The New Era of PE: The GTM & Operating Alpha Imperative
PE Returns to First Principles: The Operating Alpha Imperative
The old PE playbook is dead (especially from the 2010-2022 era). Over that period, roughly two-thirds of PE value creation came from leverage and multiple expansion. That’s not alpha. That’s beta dressed up in carry.
With rates normalized, the math no longer works. Since 2018, capital calls have exceeded distributions by approximately $1.5 trillion. Exits are slow, DPI is depressed, and fund lives are stretching well beyond expected 10-year terms. IRRs are suffering accordingly.
The bid-ask gap persists because buyers can underwrite less leverage while sellers remain anchored to peak-cycle valuations. GPs are holding assets longer, hoping to grow into return targets that were underwritten in a different rate environment.
Public Markets Offer No Refuge
The number of public companies has been cut in half over two decades. The top 10 stocks in the S&P 500 now represent 40% of benchmark market cap. Passive flows dominate price action, amplifying crowding and reducing the role of fundamentals.
The investable universe is shrinking while index concentration increases. Not a compelling alternative.
The Path Forward
The prescription is straightforward:
- Source deals in a proprietary way where the competition is limited
- Develop detailed value creation plans focused not only on Operating Improvements but especially on modern Capital-Efficient GTM & Revenue + EBITDA Growth Improvements. Build world-class PE Value Creation teams with real-world experience growing companies.
- Underwrite multiple exit paths from day one.
Dispersion between top and bottom quartile funds now exceeds 25 percentage points – implementing Portfolio Value Creation / Portfolio Ops best practices is crucial.
The Operating Alpha Gap
“Operational improvement” in PE has historically meant cost rationalization, procurement optimization, back-office consolidation. Necessary, but insufficient. Cost cuts are one-time. They don’t compound. And in a high-multiple environment where leverage can’t manufacture returns, the math demands top-line growth to drive terminal value.
Consider: a middle-market company growing at 15% vs. 25% over a 5-year hold represents a ~50% difference in terminal revenue. At consistent margins and exit multiples, that delta flows directly to equity value.
The firms generating true “GTM & Operating alpha” are building proprietary capabilities around Revenue Acceleration (and EBITDA expansion), not traditional operating and margin improvements.
The GTM Value Creation Imperative
The differentiation is now in dedicated portfolio value creation teams with deep GTM specialization:
- Sales Force Effectiveness: quota attainment, territory design, comp alignment, methodology implementation
- Pricing: value-based transformations, contract structure optimization
- Customer Experience & Economics: NRR improvement, churn reduction, expansion revenue
- Demand Generation: pipeline architecture, CAC/LTV optimization
- CRO Enablement: GTM leadership, processes, forecasting accuracy, sales/marketing alignment
Why in-house proprietary Portfolio Value Creation expertise is key to success: internal teams have to be made up of real experts who have been in the seat, led teams and delivered results to the Board.
The New LP Diligence Standard
Sophisticated LPs are diligencing GP operating capabilities with the same rigor applied to track record. The questions have shifted from “do you have operating partners?” to:
- How many dedicated GTM specialists on your value creation team?
- What’s your average revenue CAGR uplift vs. pre-acquisition baseline?
- Show me case studies with specific KPI improvements.
- What’s your playbook for converting founder-led sales to a scalable engine?
The Bottom Line
PE must return to fundamentals. But the definition of “operational value creation” needs to evolve and become “GTM & operational value creation”. Cost optimization is defense. Revenue acceleration is offense. In a normalized rate environment, you need both. But growth is where the differentiated returns live. The firms that will generate alpha are those building proprietary, institutionalized GTM capabilities that systematically drive revenue growth across their portfolios. Everyone else is hoping for a return to 2021.