Private Equity Value Creation: Equally Viable Alternative to PE Deal Teams?

Private equity value creation came on my radar a few years ago when I noticed something: Even though traditional PE deal roles were not doing well, “operational” or “value creation” teams still seemed to be recruiting.

We kept getting messages from students and clients like the following:

“I’m currently working at a Big 4 firm and haven’t gotten many responses to my applications for traditional PE roles, but several value creation teams have invited me in for interviews.

Are these good opportunities? What should I expect? And are they worth doing over traditional PE deal-based roles?”

These are great questions, so I’ll cover them in this article, starting with what the team does:

What is “Private Equity Value Creation?”

Private Equity Value Creation Definition: The PE value creation team, also known as the operations, portfolio operations, or portfolio resources team, aims to make private equity firms’ portfolio companies more valuable by improving their revenue and profit margins.

If you Google this topic and look at the results, you’ll find articles and discussions about LBO models and points like the returns attribution analysis:

This type of “value creation” measures the returns sources in a buyout deal: Debt paydown vs. multiple expansion vs. EBITDA growth.

However, the “private equity value creation” team isn’t about spreadsheets but rather implementing changes that improve the company.

They aim to boost the company’s EBITDA not by making more aggressive assumptions in Excel but by taking real-life steps to increase revenue and cut expenses.

You can think of it like “Consulting, but with less ‘planning’ and more ‘doing.’”

The team structure varies widely, but upper-middle-market firms and mega-funds tend to have dedicated operations teams, while smaller firms combine their operations and deal teams.

Sometimes, it’s more like “in-house consulting” for portfolio companies with specific problems, and in other cases, the value creation team reviews every company and applies a specific set of steps to improve efficiency.

These value creation teams tend to hire two types of candidates: Seasoned executives for Partner-level roles and management consultants for junior-level positions (typically from the top firms of McKinsey, Bain, and BCG, known as “MBB”).

They may occasionally hire from corporate development and corporate strategy teams, but they would prefer to hire candidates in operational roles at their own portfolio companies.

For example, a VP of Business Development or Partnerships at a portfolio company might be a strong candidate for the value creation team at the PE owner.

What Does the Private Equity Value Creation Team Do in Real Life?

The work in these value creation roles spans a wide range, but it could include:

• Revenue Growth: Increase prices for unprofitable customers or fire them; implement up-sells or subscription plans to boost annualized recurring revenue; expand into new markets or geographies; monetize currently unused IP; tweak the sales and marketing strategies to win higher-ticket accounts.
• Margin Improvement: Outsource or automate more functions; cut unnecessary R&D spending; fire underperforming salespeople; reduce wasted marketing budgets; reduce the company’s rent by consolidating buildings/locations.
• People: Hire more experienced managers; improve the recruiting and onboarding processes.
• IT: Digitize old-school businesses that are still behind or improve the tech for more modern firms.

Management consultants recommend some of these; the operations team implements them.

The value creation team does not necessarily execute bolt-on acquisitions because the deal team is usually better equipped there (value creation will handle post-deal integration).

Also, the value creation team does not necessarily do much due diligence, even if it’s operational in nature.

This is more the responsibility of the deal team at many firms, but there is some variance based on how closely integrated the teams are.

The optimistic take on this work is that many companies are run inefficiently, and they benefit from these improvements.

The pessimistic take is that many PE firms use “value creation” as an excuse to underinvest and optimize the company for a short-term exit.

For example, many of the big tech private equity firms have been accused of doing this and creating worse long-term outcomes for companies they once owned.

Why is PE Value Creation Suddenly “Hot”?

Going back to the value creation definition above, two out of three returns sources in most deals – debt paydown and multiple expansion – will not work as well in the future.

When interest rates were at ~20% in 1980 and fell substantially over the next few decades, virtually all financial assets benefited: Corporate bonds, equities, and private equity.

Private equity firms didn’t have to do much to “buy low and sell high” because they could count on valuation multiples increasing over time.

The global demographic profile was also favorable, with the world population nearly doubling between 1980 and 2020, technology and outsourcing made many products cheaper, and inflation and energy prices were mostly low/stable (see more in this article).

However, we’re now in a completely different macro environment.

Many countries now have declining populations, inflation is higher and less stable, and interest rates are higher and unlikely to fall to 0% again – so PE firms cannot just bet on higher multiples for their portfolio companies.

Instead, they need to turn to EBITDA growth to earn high returns, which means using value creation teams to boost revenue and cut costs.

How to Recruit for Private Equity Value Creation Roles

Recruiting for the value creation teams happens on an “as needed” basis, so it’s much closer to the off-cycle private equity recruiting process.

These teams like to recruit consultants from the top firm (MBB), but as mentioned above, some people also get in from Big 4 consulting roles, corporate development/strategy, and operational roles at PE-owned portfolio companies.

These teams do not seem to recruit many people with a traditional investment banking background, presumably because bankers are clueless operationally.

You can contact the standard group of PE headhunters or even consulting or executive-level headhunters, but in most cases, it comes down to networking with the “Operating Partners” and other team members directly.

There are some industry conferences and events, such as the “Operating Group Partners Forum,” but these are more for senior-level hires.

Interviews are like management consulting interviews, with a mix of fit/behavioral questions, resume walkthroughs, and consulting-style case studies.

They’ll also create case studies on the spot where they give you basic information about Portfolio Company X and ask how you might improve it.

You can’t learn about each portfolio company before the interview, so the best method is to practice many cases across varied industries, focusing on growing revenue and improving margins.

Private Equity Value Creation Careers: Are You a “Second-Class Citizen?”

Each PE firm runs its operations team differently, but the short answer is:

• It is far from a “back or middle-office job,” as some people claim.
• However, it is still a rung or two below the deal team in terms of perception and compensation (see below).

The problem is that operational improvements can improve deals and boost returns, but they’re not necessarily required.

On the other hand, if a PE firm pays the wrong price or structures a deal incorrectly, it might fail regardless of any operational improvements.

Therefore, the deal team at the PE firm will always be viewed as “more important.”

Sometimes, the operations team is a bit of a ”whipping boy,” blamed when things go poorly but not given proper credit when they go well (similar to CFO roles).

All that said, joining as an Operating Partner after a previous executive career is a pretty good deal; you work normal hours, do interesting work, and can still earn a lot.

Joining as an Associate or something else midway up the ladder is a bit murkier.

First, depending on the firm, the promotion/advancement opportunities may not be clear.

There may not be a real path to the Operating Partner level unless you gain executive/operational experience at a normal company after working in the value creation team.

If you want to move up the ladder directly, you’ll have more luck joining a firm with “specialist” operational teams where a specific person handles a single task like supply-chain optimization.

The main advantages of a value creation career at the junior level are:

• You get better hours (50 – 60 per week) than in standard PE or consulting.
• You travel less than in consulting.
• You earn higher pay than in consulting and get to do more interesting work.

Private Equity Value Creation Salaries and Bonuses

You should expect a 10 – 20% discount on traditional private equity salaries and bonuses.

As of 2024, that means something like these numbers at a mid-sized fund:

• Associate: $200 – $300K depending on the firm size.
• Senior Associate: ~$400K.
• VP: ~$500K.
• Principal: ~$600K + $2 – 4M carried interest over fund life.
• Operating Partner: ~$1M + $4 – 6M carried interest over fund life.

Sources: The Heidrick Private Equity Compensation Report and The Operating Partner.

There are a few nuances here as well.

One point is that not all firms have strictly defined hierarchies for the value creation team, so these specific titles may not always be used.

Also, at some firms, the Operating Partners get carried interest in the entire fund-wide pool, while others grant it on a deal-by-deal basis, which could be good or bad.

Exit Opportunities from Private Equity Value Creation Roles

So, if you want to work on deals in private equity, can you start in the value creation team and move over?

Well… don’t get your hopes up.

In theory, it’s possible, but it’s not that likely unless you’ve had deal experience in a previous role, such as investment banking or corporate development.

It’s the classic chicken/egg problem: They want people with deal experience, but you must be in the team to get that experience.

The main promotion path in the value creation team is not always clear, so the path into other groups at the PE firm is even less clear.

The most likely exits are to operational roles at portfolio companies, management consulting, corporate strategy, or consulting at other firm types, such as the Big 4 (i.e., reverse the entry points into value creation).

All that said, the job can still be useful if you want to move into the PE investing team eventually, especially if you’re coming from a non-finance background.

It’s just that you’ll need to get deal execution experience first to maximize your chances.

Final Thoughts: Is Private Equity Value Creation Worth It?

Returning to the original question, private equity value creation roles can be good opportunities, but I wouldn’t recommend them over deal-based roles for most people.

It’s best to think of them as “upgraded consulting,” with higher pay, better hours, less travel, and more interesting work.

PE value creation is not “middle office” or “back office” work, but it’s also not exactly on par with the deal team, especially at the junior levels.

You must also be careful with the specific firm because there are huge variances in the work, pay, promotion, and hierarchy – far more so than in deal-based PE roles.

If your long-term goal is to get into traditional private equity and you get an interview with the value creation team, sure, take it.

But if you have other opportunities that would give you real deal experience, even if they’re not official IB / PE roles, I recommend them over value creation in most cases.

It’s sort of like venture capital careers: Nice for a short stint, but much better as a long-term job at the end of your working life rather than the beginning.

Resources to Learn More About Private Equity Value Creation

If you want to learn more, here are a few links:

• Value Add PE – Great case studies of how PE firms turned around portfolio companies, but most are paid.
• Private Equity Funcast Podcast – There are a few episodes on value creation; I didn’t find them terribly insightful, but you might learn something.
• The Operating Partner – Solid articles and interviews with people in the industry.
• From Consulting to Private Equity: How to Make the Leap