Private equity can no longer rely on cheap money and rising multiples. To achieve returns, investors must dig deeper into the business itself. “Broader due diligence and more active value creation have become increasingly important in recent years”, says Rob van den Berg, Director of Strategy & Operations at Eight Advisory.
For decades, private equity has been a powerful engine for the European economy. The best investors distinguish themselves through strategic vision and operational discipline: they actively build their portfolio companies, unlock untapped value, and create sustainable growth. This craftsmanship has left its mark. In the Netherlands and beyond, private equity firms have produced well-managed, profitable companies that structurally strengthened their sectors.
But the macroeconomic context has changed dramatically in recent years, putting pressure on average returns in the sector. Interest rates have risen, making debt more expensive and reducing the contribution of financial structuring to returns. When selling companies, investors face lower multiples than those at which they entered – known as multiple compression.
At the same time, the private equity landscape itself has become more crowded: more players are competing for the same high-quality companies, driving up entry prices. Holding periods have also lengthened, as sales processes are more frequently delayed or canceled.
This shift requires a new approach, says Rob van den Berg, Director of Strategy & Operations at Eight Advisory Benelux, an independent advisory firm specializing in transactions, restructuring, and transformations. The company provides strategic solutions to improve corporate performance and unlock untapped value for businesses and their investors.
Over the past years, Eight Advisory has executed a wide range of assignments for private equity parties active in Europe. For the French investor Extens, which specializes in healthcare technology, the firm provided both financial due diligence and carve-out support for multiple transactions, including the acquisition of the Dutch company Medicore and the sale of Teranga Software.
For Chequers Capital, Eight Advisory repeatedly acted as an advisor on acquisitions and divestments, with work in financial and tax vendor due diligence, including for ECT and the acquisition of the SERMA Group from Ardian.
Additionally, Eight Advisory supported Tour Partner Group, financed by Mayfair Equity Partners, in a Scandinavian acquisition, including integration planning and synergy analysis. The firm’s expertise focuses on value creation and complex transactions, with a strong emphasis on the Benelux region.
Post-deal phase
The fact that Eight Advisory is often involved in the post-deal phase is no coincidence. After all, says Van den Berg, this phase is becoming increasingly important for investors. “The ‘multiple play’ no longer exists: it’s no longer the case that multiples rise sharply, allowing you to profit from an investment simply by timing your entry and exit well. This is linked to rising interest rates. Borrowing has become more expensive, forcing investors to be more creative to achieve returns. And then there’s the current geopolitical and economic uncertainty.”
These developments contribute to portfolio companies remaining in the hands of the same investor for longer periods.
Sales processes are more frequently delayed or canceled due to insufficient market interest and differences in value perception between buyers and sellers. All of this means that private equity firms can no longer rely solely on ‘financial engineering’ and must pay more attention to substantive, active value creation through a sharp strategic focus and organizational and operational improvements.
In other words: the deal itself is no longer the focus, but rather the ability to achieve tangible improvements in a more challenging climate. “Private equity must be more creative than before”, as Van den Berg puts it.
The engine room
This starts in the due diligence phase. After all, if you know that returns must come from the company itself, you want to understand as much as possible before the acquisition where that potential value increase lies.
The questions that were central during the heyday of the ‘multiple play’ – such as growth expectations, margins, and achievable synergies – are still relevant, but no longer sufficient. Van den Berg sees a much broader range of topics now being addressed. “Think of questions about supply chain dependencies, whether risks are sufficiently diversified, and how well a company can withstand disruptions. These have become much more important.”
Once a company is acquired, active value can be added by shifting focus to what Van den Berg calls the ‘engine room’ of a business: improving processes, optimizing cash flow, and sharpening the organization. This requires a more intensive involvement from the investor than was previously customary.
Carve-outs
The emphasis on value creation can also lead companies, at the urging of their investors, to divest certain parts of their business. In other words, they opt for a ‘carve-out’ to avoid having to continue devoting too much management attention and capital to underperforming units, allowing them to focus on high-return activities.
According to data from Eight Advisory, the share of carve-outs has even increased from less than 5 percent before 2020 to nearly a quarter of all deals in 2023. And this trend has only continued since.
Carve-outs are particularly relevant in the current private equity climate because they are one of the few routes where an attractive entry price and operational value creation come together. A carved-out division is generally cheaper to acquire than a standalone company, precisely because it is not yet fully self-sufficient when separated from the parent company.
This makes carve-outs a natural fit with the broader shift in private equity toward operational improvement as the primary source of returns, now that financial engineering and multiple expansion contribute less.
The downside is that a successful carve-out requires specific expertise: from building an independent organization to managing the Transition Services Agreement (TSA), which governs which services the parent company will continue to provide temporarily. Not every investor naturally possesses this execution capability.
Yet, as mentioned, carve-outs are gaining popularity. In some cases, especially in growth sectors like technology, companies are simply reshuffling their portfolios. They remain diversified businesses, but they continuously swap activities, much like Google. More often –especially in traditional sectors – carve-outs are driven by companies wanting to focus on their core activities.
This is often referred to as ‘back to core business,’ but that term is somewhat misleading, says Van den Berg. The ‘core business’ they choose doesn’t necessarily have to be the same one with which they grew.
“Look at Unilever”, says Van den Berg, citing it as a textbook example of how large conglomerates rationalize their portfolios. “The company has divested several divisions in recent years that were no longer considered core, including the margarine division with which the company originally grew. The tea and ice cream businesses were sold off, and brands like Unox and Conimex were divested.”
The company has increasingly focused on personal care products, where margins are significantly higher, in the hope of creating more value than with a broad but loosely connected portfolio. “Not ‘back to core business,’ but rather ‘toward a new core business.’”
Subpar execution
Life has not become easier for private equity firms with the end of the multiple play era and the arrival of a time when active value creation has become more important.
Van den Berg emphasizes that no matter how good a strategic vision may be, or how rosy the financial outlook, a deal stands or falls on its execution. The vision for a new portfolio company or a carved-out business (in the case of a carve-out) must align with the people responsible for its execution. “After all, they determine whether a new strategy is actually implemented and whether a company realizes its potential.”
Private equity investors recognize the increased importance of active value creation. They are also increasingly aware of it and even set up entire operational teams. However, it remains difficult, especially to get the ‘engine room’ of portfolio companies running smoothly.
Time and again, it turns out that the course envisioned by investors is not sufficiently supported by the management and employees who run the operations. Execution remains subpar, and the intended value creation is not achieved. “This therefore needs even more attention.”
