When the Value Creation Plan Stalls: Diagnosing Execution Gaps
Private equity has entered what many observers call the operational era. With higher interest rates reducing the contribution of financial engineering to returns, operational improvement has become the primary driver of value creation, accounting for 46 percent of overall value creation in 2024 according to recent industry research. Operations-driven value has risen to 47 percent from just 18 percent since the 1980s, based on analysis published by Harvard Law School’s Forum on Corporate Governance. Yet even as firms develop increasingly sophisticated value creation plans, execution remains the critical differentiator.
Recent industry surveys illuminate why value creation plans stall. Poor implementation accounts for more than half of failed initiatives: failures in planning, resourcing, and management that have nothing to do with the underlying strategy. Unrealistic business cases drive more than a third of failures, where targets are too optimistic or based on shaky assumptions. Portfolio company resistance explains another significant portion, reflecting lack of alignment or buy-in at the operating level. When the people responsible for execution aren’t committed to the plan, initiatives lose momentum regardless of their strategic merit.
The disconnect between investment teams and portfolio company management often lies at the root of execution gaps. For valid reasons of confidentiality, portfolio company leaders may lack insight into the nuances and objectives underpinning the investment thesis. Equity value creation measures tend to remain siloed from overall business performance and financial reporting. When the operations team and company management focus on different priorities than those identified in the investment thesis, misalignment happens quickly and promised synergies fail to materialize.
The solution lies in specificity and integration. Discussions around realizing gains in particular areas should bring all parties together, and these conversations should be specific. Management must understand their role in each initiative and be able to speak to costs and progress. Initiative gains or losses should be reflected in financial reporting through an EBITDA bridge that tracks performance by value creation measure. This visibility enables discussion about each initiative distinct from base business performance, allowing sponsors and management to identify problems early and course-correct.
Successful firms are moving from static, company-by-company value creation plans to more dynamic, portfolio-driven approaches. Industry data shows the share of firms reviewing value creation plans every three to six months is expected to nearly double, while those relying on annual reviews are declining. For portfolio companies where value creation has stalled, diagnosing the execution gap and implementing the accountability structures to close it often requires external perspective and hands-on support.