The value-creation levers of private equity
Buoyed by a sustained investment dynamic - €26 billion invested in France in 2024, up 16% on 2023 - private equity is evolving in an increasingly competitive environment where valuations remain high.
In this context, simply expanding valuation multiples is no longer enough: active value creation has become an indispensable tool for private equity funds to maintain attractive performance levels.
How do private equity funds actually create value over the course of an investment cycle? To answer this question, France Invest and EY (1) have analyzed a sample of 441 LBO deals, involving nearly 300 French companies supported between 2014 and 2021.
This study highlights three main levers of value creation:
- Earnings growth: the increase in Ebitda in LBO deals is responsible for two-thirds of value creation
- Multiple expansion: the evolution of the valuation multiple (often based on Ebitda) between fund entry and exit contributes 35% to value creation.
- Debt reduction: in recent years, financial leverage has had a neutral impact, as companies under LBO have often taken on additional debt to finance external growth operations.
Growth in earnings: organic growth and acquisitions
In a competitive environment where organic growth has become more difficult, the funds are focusing on commercial expansion, new product development and internationalization. To achieve this, fund teams have been strengthened to improve the operational performance of portfolio companies. This has led to the recruitment of operating partners, whose number in France has doubled between 2018 and 2023.
Business acquisition and integration
These complementary acquisitions enable the portfolio companies to rapidly increase their market share, broaden their offering and generate commercial and operational synergies. With Pinnacle Dermatology, Chicago Pacific Founders pursued an ambitious external growth strategy, making 40 acquisitions that enabled Pinnacle to grow from 4 to 88 clinics and multiply its Ebitda by 10 in 4 years. This approach was decisive in creating value, enabling Chicago Pacific Founders to realize a 9x multiple on the transaction, transforming Pinnacle into a national leader in dermatological services, present in 11 US states.
Multiple effect: improving the valuation profile
In addition to intrinsic growth, funds also act on the perceived quality of their companies to justify a higher valuation multiple at exit. Larger, more structured companies then attract more buyers. France Invest highlights a marked correlation between company size and valuation multiple, rising on average from 7.3x Ebitda for valuations over €50m to 12.8x for those over €500m.
Business sector also plays a decisive role, with multiples higher in high-growth or recurring-revenue sectors such as software or healthcare, than in more cyclical or capital-intensive sectors.
Debt reduction: repayment of acquisition debt thanks to cash generation
Debt reduction, traditionally associated with value creation in LBO transactions, has shown a neutral isolated effect in recent years. This trend is partly explained by the external growth strategy adopted by many companies backed by private equity funds: according to the EY and France Invest report, 64% of them made at least one acquisition during the holding period.
These operations are generally financed by debt, leading to an increase in debt in absolute terms. However, the parallel growth in Ebitda enables us to maintain a stable debt-to-equity ratio.
Value creation strategy as a selection criterion
For investors, a fund's value creation strategy should be a key element in the selection process. The funds that stand out today are those that have succeeded in implementing a structured, replicable approach capable of generating sustainable performance. This capacity for targeted, disciplined execution has become a decisive asset for differentiation in a highly competitive market.
(1) France Invest, "Activité du capital-investissement français" (2024); "Création de Valeur dans les PME et ETI françaises accompagnées par les acteurs français du capital-investissement" (2024)
