The private-equity operating model is being redrawn. According to Paktolus, higher interest rates and tighter credit have reduced the role of leverage as a return driver. In response, firms are embedding operating expertise earlier in the investment lifecycle and accepting that value must be built, not borrowed.
The end of easy leverage
For much of the last decade, cheap debt amplified returns even when operational improvement was modest. That era has ended. The cost of debt now consumes a larger share of cash flow, and lenders are more cautious. A deal that looked attractive on leverage alone now needs genuine operational upside to clear the hurdle rate.
This changes how firms staff deals, manage portfolios and plan exits. Operating teams are no longer a support function brought in after closing. They are part of the investment thesis from the start.
Operating expertise earlier
Embedding operating expertise earlier means several things in practice. It means involving operating partners in due diligence to test whether value-creation plans are achievable. It means appointing fractional or interim executives quickly after acquisition to address the biggest gaps. It means tracking operational KPIs with the same rigour as financial metrics.
It also means being honest about what the existing management team can and cannot do. Not every leadership team is equipped to execute a sharp turnaround or a rapid digital transformation. Bringing in targeted expertise early is often cheaper than replacing a whole team later.
The goal is to identify the few moves that will drive the majority of value and to resource them immediately. In many cases, the right move is not a dramatic restructuring but a focused intervention in pricing, sales coverage, technology or supply chain.
Built, not borrowed
The phrase “value is built, not borrowed” captures the new reality. Returns will come from improving the business itself: revenue growth, margin expansion, working-capital efficiency and risk reduction. These are harder than financial engineering, but they are also more durable and more defensible at exit.
For portfolio company leaders, the implication is that operational discipline is no longer optional. The firms that thrive under the new model will be those that treat value creation as a continuous operating discipline, supported by the right leadership at the right time.