Value creation: From portfolio strategy to LP reporting

What is value creation in private equity?

In private equity (PE), value creation is the process of actively increasing the worth of a portfolio company (portco) through strategic and operational intervention. Unlike public market investing, which is often passive, PE firms take a hands-on approach to portfolio management for the companies they acquire, with the goal of delivering faster, more substantial gains than their public or family-owned peers. This active management is the core of private equity investments and the primary justification for the management fees firms charge their limited partners (LP).

The shift from financial engineering to operational alpha

Traditionally, firms relied on financial engineering—using high leverage and multiple expansion—to drive returns. However, the 2026 landscape has doubled the stakes. While 5% annual EBITDA growth could once secure a 2.5x MOIC, today’s borrowing costs of 8% to 9% mean that same return now requires 10% to 12% annual EBITDA growth.

This shift toward operational alpha—the superior return generated through tangible business improvements—has created a stark performance divide. While established managers grapple with "cash drag," nimbler emerging managers are outperforming significantly. For the 2022 vintage, established buyout managers saw median net IRRs of just 9.9%, while emerging managers—putting capital to work with greater precision—delivered 30.0%.

With higher interest rates and increased market volatility, firms can no longer depend solely on financial restructuring to generate profit. This has led to a focus on operational alpha, which is the superior return generated through tangible, hands-on improvements to a portco’s business. This approach transforms PE value creation from a passive financial exercise into an active discipline of strategic portfolio management.

This means that instead of just relying on market tailwinds or clever financing, today’s most successful firms have learned how to build better businesses faster.

For top-performing PE firms, the ability to improve core operations is a key differentiator. This focus on operational value creation is clear in how PE investors structure executive incentives. 

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The value creation plan: From thesis to exit

Because PE firms are focused on rapid value realization from their investments, their strategy for improving a portco is formalized in a value creation plan (VCP). This plan serves as the strategic roadmap that a firm develops for each company it acquires. The VCP outlines the specific initiatives the firm will undertake to drive growth and improve profitability over the course of its investment.

A modern VCP is not a high-level strategic document that sits on a shelf. It is a practical guide for execution, detailing timelines, responsibilities, and key performance indicators (KPI) for each initiative throughout the investment hold period. From the initial deal analysis to the final exit, the plan evolves to address new challenges and capture emerging opportunities.

Modeling the VCP during due diligence

During the due diligence phase, fund managers face the challenge of translating their investment thesis into a financial model. This model must predict how the proposed operational and strategic changes will affect the company's value. Traditionally, firms used disconnected spreadsheets, which are difficult to update, prone to error, and cumbersome for testing different scenarios.

Modern diligence is now a search for “full potential.” Firms like Hg (OneStream deal, Jan 2026) now integrate AI-readiness directly into their underwriting to ensure the VCP can be executed on day one.

Executing the plan post-acquisition

The work of value creation begins in earnest the moment a deal closes. With average hold times drifting to 7 years (up from 5.7 in 2021), the 100-day plan has evolved into a critical tool for compressing timelines to combat the industry's $3.8 trillion inventory backlog.

During this initial phase, the PE firm and portco management must align on strategy and incentives. Speed is a competitive necessity; as fund-closing cycles have stretched to 25 months, efficient portfolio management is the only way to accelerate liquidity. Successful execution hinges on establishing clear ownership for every initiative, maintaining a rigorous review cadence, and utilizing real-time visibility into portfolio monitoring and KPIs.

Key levers for value creation in private equity

While every value creation plan is tailored to the specific needs of a portco, most rely on a combination of proven strategies, or levers, to drive value. These value creation levers can be broadly categorized into four main areas: growing revenue, improving profitability, pursuing strategic acquisitions, and empowering human capital.

Driving value through commercial excellence and revenue growth

This lever focuses on top-line growth strategies. PE firms often help portfolio companies refine their go-to-market strategy, optimize their pricing models, and improve the effectiveness of their sales force through equity compensation to accelerate revenue. The goal is to increase the amount of money the company brings in.

However, growth is not the only objective. As Shiv Narayanan, founder of How To SaaS, explains during Carta’s Value Creation through Employee Equity webinar, the focus has shifted from pure growth to profitable growth. Firms are now more willing to make tradeoffs, such as sacrificing some revenue in the short term to significantly improve long-term value and efficiency.

Driving value through operational efficiency

The most direct operational lever for value creation is improving a company's profitability by focusing on bottom-line improvements and expanding profit margins. PE firms drive value by identifying and eliminating inefficiencies within a company's operations. However, this involves building a more efficient and resilient business by optimizing spending, streamlining processes, and improving profit margins. This can include a wide range of initiatives, such as renegotiating supplier contracts, streamlining manufacturing processes, or optimizing the organizational structure.

To execute these margin-expansion strategies, firms require a unified data architecture. Rather than relying on fragmented reporting, a centralized ledger provides a single, verifiable record for all transactions. This visibility allows GPs to track expenses with granular detail and identify savings opportunities across the entire portfolio simultaneously.

Driving value through strategic acquisitive growth

A third powerful lever is strategic mergers and acquisitions (M&A). A common approach is the buy-and-build strategy, where a PE firm uses a high-performing portco as a “platform” and then makes a series of smaller, strategic “bolt-on” acquisitions. These subsequent deals are designed to expand market share, enter new geographies, or add new product lines.

This strategy must now address a record $585 billion “exit overhang” (backlog of unsold assets). GPs are increasingly turning to secondaries, with AUM hitting a record $526 billion in 2024, to manage capital deployment without waiting for frozen IPO markets.

This approach presents a significant operational challenge, as the competition for deals requires a fast and efficient deal flow process. For firms like Bochi Investments, which focuses on acquiring smaller companies, speed is a competitive advantage. Using special purpose vehicles (SPV) allows the firm to structure investment entities quickly, reducing overhead and enabling them to capture compelling opportunities before larger firms can act.

Furthermore, continuation vehicles (CV) have emerged as a vital lever for managing “unrealized value” in high-performers, with 40% of GPs now using them to provide liquidity without a full exit.

After the deal, the challenge shifts to integrating the new company's financials, often requiring purchase price allocation, and updating the cap table. This reinforces the need for a unified platform to maintain a clear view across the growing portfolio and ensure the combined entity operates seamlessly.

Driving value through human capital and ownership

A value creation plan is only as strong as the team executing it. As Narayanan explains, “The critical point of failure is if you have the right people...if you don't have the right leader for revenue or sales or marketing or product, your plans are going to fail.”

To solve this, PE firms are increasingly using performance-based equity to align management with fund goals. Carta data from 2025 shows the depth of this integration: When PE firms issue equity grants with performance conditions, about 52% of those conditions are linked directly to metrics that measure financial return for the owner, such as MOIC or IRR.

• Long-term focus: Ownership encourages employees to prioritize long-term growth over short-term wins.

• Operational discipline: When employees have a stake in the outcome, they tend to be more cost-conscious and focused on efficiency.

• Innovation: An ownership culture can lead to more proactive problem-solving and innovation from all levels of the organization.

This ownership culture is expanding into the private wealth channel. As individual investors move toward a 15% allocation in private assets (up from 3%), firms must build intelligence infrastructure to educate this new class of LPs. The urgency to institutionalize these programs is growing as the private wealth channel expands. In APAC alone, the number of family offices actively investing in private markets has surged by 378% since 2019.

According to PE data, the percentage of PE-backed LLCs on Carta issuing equity to non-management employees grew from 25% in 2021 to 36% in 2023. This strategy is gaining traction, as seen with professional services firm Sikich, which expanded its employee ownership program after receiving a minority investment from PE firm Bain Capital. The firm recognized that to drive acquisitions and retain top talent, it needed to evolve its approach to compensation.

However, managing these equity plans, especially for LLCs with complex structures like profits interest, can be operationally challenging. Structuring these incentive plans correctly is crucial for success.

To help your firm navigate the nuances of PE management incentives, download our free guide on how to structure PE ownership for portfolio companies.

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Carta's equity management platform for PE-backed LLCs provides the necessary infrastructure to manage these programs at scale, simplifying the complexities of equity value creation for all stakeholders.

How to measure and report value creation

In a “K-shaped” recovery, LPs are no longer satisfied with "paper gains" (TVPI). For the first time since 2015, sponsor distributions have exceeded capital contributions, making DPI (distributed to paid-in capital) the primary predictor of a firm’s survival.

The demand for visibility is also a directive from the industry’s largest players. Speaking at the NEXUS 2026 event, Marcie Frost, CEO of CalPERS—the largest public pension plan in the U.S. with $613.65 billion in assets—emphasized that managers providing "greater levels of underlying investment data" would help the pension better manage its risk. While private markets are private for a reason, Frost noted that if a portfolio is not outperforming public markets, it must be questioned.

Bridging the gap between daily portco operations and these high-level financial metrics requires a cohesive value creation story. The process follows a logical hierarchy:

1. Portco KPIs: Tracking the ground-level metrics defined in the VCP (e.g., CAC, EBITDA margin).

2. Portfolio valuation: Translating those operational wins into data-driven valuations.

3. Fund-Level metrics: Aggregating these valuations and exit cash flows into the IRR and DPI figures reported to LPs.

Transparency is also a critical lever for cost control and firm reputation. According to 2025 survey data, 55% of GPs cited service provider errors as the primary reason for switching fund administrators, while 50% cited high costs as the reason for switching legal counsel. A modern system mitigates the operational risks that are increasingly driving GPs to seek more efficient partners.

This demand for transparency highlights the shortcomings of traditional reporting methods, which often rely on fragmented and outdated information. A modern, integrated approach provides a much clearer and more timely picture for your LPs.

A platform with a dedicated Carta LP Portal and Partners Dashboard delivers this modern experience. By giving your LPs a single, secure login to view performance data, access fund documents, and track their investments, you can build trust and strengthen the GP-LP relationship through radical transparency.

Connecting portfolio performance to fund returns

LPs are no longer satisfied with paper gains. While traditional PE funds of a 2023 vintage delivered a 1.02x median net multiple, multi-asset continuation funds delivered 1.47x. This outperformance justifies the move toward innovative fund structures.

Carta's Portfolio Valuations service provides PE firms with reliable, data-driven valuations that reflect the true progress of their value creation efforts. This gives both the firm and its auditors confidence in compliance and the reported numbers and ensures that the value being created is accurately measured and communicated.

From operational metrics to LP reports

A common pain point for fund managers is the process of compiling LP reports. As funds grow, so does the administrative burden: The median LP count for a fund larger than $250 million is 104—four times higher than for a small fund. This often involves manually pulling data from numerous spreadsheets, email threads, and siloed systems. This process is not only slow and inefficient but also prone to errors that can erode investor relations and trust.

This shift toward transparency is also about protecting the private market premium while ensuring LPs have the data to manage risk effectively. To meet these expectations, CalPERS previously used a data convergence project to standardize ESG reporting across categories like greenhouse gas emissions and workers' compensation claims. Providing this level of granular data through an integrated platform satisfies the LP board's need for oversight without detouring returns.

Standardizing the value story with ESG data

To standardize how GPs report on non-financial value drivers, the Data Convergence Project—led by CalPERS and the Carlyle Group—established six core categories of ESG metrics. This framework allows LPs to compare manager performance using hard data rather than anecdotal evidence.

Building your value creation engine

In the age of AI, PE-backed firms are uniquely positioned. Experts anticipate Al will disproportionately benefit private companies as they can leverage Al for operational efficiency while staying private longer to capture the full value cycle.

A modern value creation plan requires an equally modern execution machine. This means having an integrated operational infrastructure that connects every aspect of fund management, from accounting to LP reporting.

This stands in stark contrast to the old model of using disconnected spreadsheets, email threads, and multiple service providers. That fragmented approach not only creates operational risk but also hides valuable portfolio monitoring insights that could be used to drive better decision-making.

For an established firm like Kayne Anderson, which manages a multi-billion-dollar PE portfolio, having a single source of truth is essential for precision and control. The firm uses unified fund management software to manage everything from portco data to LP reporting, ensuring its team has the accurate, real-time information needed to execute its strategy effectively.

Investing in an institutional-grade back office is a direct investment in your firm's ability to execute its value creation strategy and deliver superior returns. By centralizing data and automating workflows, you empower your team to move from back-office administration to strategic partnership, ultimately driving the performance of the fund.

Carta’s PE software connects the entire value creation process. This unified system transforms the fund CFO's role from a reactive administrator to a proactive, strategic partner who can drive value.

To see how Carta’s platform can streamline your fund's operations, request a demo.

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Frequently asked questions about value creation

What are the primary types of value creation?

The main value creation levers are operational efficiency, strategic financial management, human capital programs, and acquisitive growth. These allow firms to improve a company's profitability, financial structure, talent, and market position.

What is the difference between value creation and value capture?

Value creation is the process of making the entire economic pie bigger by improving a company's performance and worth. Value capture, on the other hand, determines how that larger pie is sliced and distributed among the company's investors and other stakeholders.

What are the key metrics for measuring value creation?

Value creation is measured at two levels: at the portco level using metrics like EBITDA growth and margin expansion, and at the fund level using metrics like IRR and multiple on invested capital (MOIC).

How does EBITDA growth contribute to value creation?

Growth in EBITDA is the direct financial result of successful operational improvements. It is often considered the most reliable driver of a company's value, especially when market conditions are uncertain.

How has the EBITDA growth requirement changed?

 Historically, 5% growth sufficed. Due to higher interest rates and stagnant multiples in 2026, firms now solve for 12% EBITDA growth to maintain historical returns.

What is a value creation bridge?

A value creation bridge is a financial analysis that visually breaks down a deal's total return into its core sources. It shows how much value came from EBITDA growth, multiple expansion, and debt paydown.