Uncovering elusive alpha
THE NEW INVESTMENT IMPERATIVE IN PRIVATE EQUITY
Higher rates, persistent inflation, elevated volatility and wider return dispersion are changing the PE value creation playbook for PE managers. The past era of relying on cheap leverage and market beta to drive multiple expansion valuations has passed.
In this new environment, returns are more likely to depend on company-specific outcomes such as revenue growth, operational improvement and technology enablement. In 2025, revenue growth and improved profitability drove 92% of value creation in exits.
Contributions to gross MOIC for average exited buyout deal
Source: MSCI as of June 30, 2025. MOIC refers to Multiple on invested capital.
The middle market playbook is built for the new environment
While large cap buyouts have relied more on falling rates, rising valuations and low inflation to drive returns, U.S. middle market private equity managers have historically leaned more on operational value creation through revenue growth and margin expansion.
Middle market companies have historically delivered roughly 330bps–380bps higher median annualized revenue growth during the holding period than large cap peers, an advantage that is likely to be decisive in the new investment regime.
Global buyout holding period revenue CAGR
By company size
Source: Gain, “The Private Equity Value Creation Report, 2025.”
AI: The Next Driver of Value Creation
As AI expands more broadly and deeply into the real economy, we expect the opportunity to broaden from the companies building AI to the companies using it to drive productivity and growth.
Middle market businesses—given their smaller size and greater potential for efficiency gains—are where AI-adoption can have the strongest impact on growth. Private equity sponsors are uniquely positioned to drive that integration as they can share best practices across portfolio companies and turn successful strategies into repeatable playbooks.
Read the Financial Times’
“The Elusive Alpha in the U.S. Middle Market”
LEARN MORE ABOUT THE OPPORTUNITY IN MIDDLE MARKET PE
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