Dry Powder: The Private Equity Podcast

The Renewed Urgency of Operational Due Diligence

As margins shrink, private equity houses are rediscovering the vital importance of operational due diligence.


The Renewed Urgency of Operational Due Diligence

Looking back at the last decade of returns for the private equity industry, about half can be attributed to multiple expansion. The second-largest lever for returns has been revenue growth. The third-largest lever has been margin expansion, which may come as a surprise. Historically, margin expansion has been the bread and butter of the PE industry, but times have changed.

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“We actually found, on average, EBITDA margin declined in many private equity investments,” says Greg Schooley, who leads Bain’s Operational Value Creation team. “Deal teams were expecting a few-point expansion and actually saw a few points of decline.”

Today on Dry Powder, I ask Greg how margin expansion became a lagging value driver for private equity and what the industry can do to reverse this trend. We will see how the leading PE firms are using unique data sets and cutting-edge tools to accurately forecast the profit potential of a target company. We’ll also see how clear value-creation plans can light a fire under management teams.


The Private Equity Podcast

In our podcast series, Bain's Hugh MacArthur interviews leading experts on the trends and opportunities that will redefine the private equity industry.