PE Outlook: Value Creation is Key
A new private equity outlook from Bain & Company and StepStone Group finds that hands-on value creation is now the critical driver of success for GPs. The report also highlights sustained demand for co-investments and the growing use of the secondaries market for portfolio management.
With financial engineering no longer a primary return driver, the private equity playbook has shifted to operational improvements. Top-tier returns now demand significant EBITDA growth, with one Bain report suggesting a 12% annual increase is the new benchmark, a steep rise from the previous 5% expectation. This requires a hands-on approach, focusing on tangible changes in strategy, operations, and market positioning from day one. Valuation gaps between buyers and sellers remain the single biggest hurdle to closing deals, cited by 36% of GPs as the main reason for failed transactions in 2025. Consequently, firms are increasingly adopting thematic investing to proactively identify opportunities and map out value chains, rather than waiting for assets to come to market. This strategic focus is crucial in a market with a $3.8 trillion backlog of 32,000 unsold portfolio companies. The secondary market is now a critical tool for portfolio management, with transaction volumes expected to exceed the $226 billion record set in 2025. GP-led secondaries, particularly continuation vehicles, are becoming standard practice, with about 40% of GPs planning to explore one in the next two years to provide liquidity to limited partners (LPs). This mechanism allows firms to retain high-performing assets while returning capital to investors who are increasingly focused on DPI (distributions to paid-in capital). Within the Technology, Media, and Telecom (TMT) sector, private equity continues to be a major driver of M&A activity, investing $52 billion in Q3 2024 alone. The sector's recurring revenue models and opportunities for operational scale are highly attractive. Notable recent transactions include Blackstone's $3.5 billion investment in Techno Holdings and Centerbridge Partners' $2 billion acquisition of MeridianLink. For LPs, co-investments are in high demand as they offer a way to increase exposure to high-conviction deals with lower fees. This trend is creating more opportunities for investors who can move quickly and act as strategic partners to fund managers, especially in the lower and middle markets where capital is more constrained.
