What is Value Creation? From Portfolio Strategy to Reporting

Value creation: From portfolio strategy to LP reporting

Author: The Carta Team
Read time: 11 minutes
Published date: March 26, 2026

Learn about the private equity value creation process, including building a strategic plan, executing on growth levers, and connecting portco performance with fund-level returns.

What is value creation in private equity?

In private equity (PE), value creation is the process of actively increasing the worth of a portfolio company (portco) through strategic and operational intervention. Unlike public market investing, which is often passive, PE firms take a hands-on approach to portfolio management for the companies they acquire, with the goal of delivering faster, more substantial gains than their public or family-owned peers. This active management is the core of private equity investments and the primary justification for the management fees firms charge their limited partners (LP).

The shift from financial engineering to operational alpha

Traditionally, firms relied on financial engineering—using high leverage and multiple expansion—to drive returns. However, the 2026 landscape has doubled the stakes. While 5% annual EBITDA growth could once secure a 2.5x MOIC, today’s borrowing costs of 8% to 9% mean that same return now requires 10% to 12% annual EBITDA growth.

This shift toward operational alpha—the superior return generated through tangible business improvements—has created a stark performance divide. While established managers grapple with "cash drag," nimbler emerging managers are outperforming significantly. For the 2022 vintage, established buyout managers saw median net IRRs of just 9.9%, while emerging managers—putting capital to work with greater precision—delivered 30.0%.

With higher interest rates and increased market volatility, firms can no longer depend solely on financial restructuring to generate profit. This has led to a focus on operational alpha, which is the superior return generated through tangible, hands-on improvements to a portco’s business. This approach transforms PE value creation from a passive financial exercise into an active discipline of strategic portfolio management.

This means that instead of just relying on market tailwinds or clever financing, today’s most successful firms have learned how to build better businesses faster.

For top-performing PE firms, the ability to improve core operations is a key differentiator. This focus on operational value creation is clear in how PE investors structure executive incentives.

The value creation plan: From thesis to exit

Because PE firms are focused on rapid value realization from their investments, their strategy for improving a portco is formalized in a value creation plan (VCP). This plan serves as the strategic roadmap that a firm develops for each company it acquires. The VCP outlines the specific initiatives the firm will undertake to drive growth and improve profitability over the course of its investment.

A modern VCP is not a high-level strategic document that sits on a shelf. It is a practical guide for execution, detailing timelines, responsibilities, and key performance indicators (KPI) for each initiative throughout the investment hold period. From the initial deal analysis to the final exit, the plan evolves to address new challenges and capture emerging opportunities.

Modeling the VCP during due diligence

During the due diligence phase, fund managers face the challenge of translating their investment thesis into a financial model. This model must predict how the proposed operational and strategic changes will affect the company's value. Traditionally, firms used disconnected spreadsheets, which are difficult to update, prone to error, and cumbersome for testing different scenarios.

Modern diligence is now a search for “full potential.” Firms like Hg (OneStream deal, Jan 2026) now integrate AI-readiness directly into their underwriting to ensure the VCP can be executed on day one.

Executing the plan post-acquisition

The work of value creation begins in earnest the moment a deal closes. With average hold times drifting to 7 years (up from 5.7 in 2021), the 100-day plan has evolved into a critical tool for compressing timelines to combat the industry's $3.8 trillion inventory backlog.

During this initial phase, the PE firm and portco management must align on strategy and incentives. Speed is a competitive necessity; as fund-closing cycles have stretched to 25 months, efficient portfolio management is the only way to accelerate liquidity. Successful execution hinges on establishing clear ownership for every initiative, maintaining a rigorous review cadence, and utilizing real-time visibility into portfolio monitoring and KPIs.

Key levers for value creation in private equity

While every value creation plan is tailored to the specific needs of a portco, most rely on a combination of proven strategies, or levers, to drive value. These value creation levers can be broadly categorized into four main areas: growing revenue, improving profitability, pursuing strategic acquisitions, and empowering human capital.

Driving value through commercial excellence and revenue growth

This lever focuses on top-line growth strategies. PE firms often help portfolio companies refine their go-to-market strategy, optimize their pricing models, and improve the effectiveness of their sales force through equity compensation to accelerate revenue. The goal is to increase the amount of money the company brings in.

However, growth is not the only objective. As Shiv Narayanan, founder of How To SaaS, explains during Carta’s Value Creation through Employee Equity webinar, the focus has shifted from pure growth to profitable growth. Firms are now more willing to make tradeoffs, such as sacrificing some revenue in the short term to significantly improve long-term value and efficiency.

Driving value through operational efficiency

The most direct operational lever for value creation is improving a company's profitability by focusing on bottom-line improvements and expanding profit margins. PE firms drive value by identifying and eliminating inefficiencies within a company's operations. However, this involves building a more efficient and resilient business by optimizing spending, streamlining processes, and improving profit margins. This can include a wide range of initiatives, such as renegotiating supplier contracts, streamlining manufacturing processes, or optimizing the organizational structure.

To execute these margin-expansion strategies, firms require a unified data architecture. Rather than relying on fragmented reporting, a centralized ledger provides a single, verifiable record for all transactions. This visibility allows GPs to track expenses with granular detail and identify savings opportunities across the entire portfolio simultaneously.

Driving value through strategic acquisitive growth

A third powerful lever is strategic mergers and acquisitions (M&A). A common approach is the buy-and-build strategy, where a PE firm uses a high-performing portco as a “platform” and then makes a series of smaller, strategic “bolt-on” acquisitions. These subsequent deals are designed to expand market share, enter new geographies, or add new product lines.

This strategy must now address a record $585 billion “exit overhang” (backlog of unsold assets). GPs are increasingly turning to secondaries, with AUM hitting a record $526 billion in 2024, to manage capital deployment without waiting for frozen IPO markets.

This approach presents a significant operational challenge, as the competition for deals requires a fast and efficient deal flow process. For firms like Bochi Investments, which focuses on acquiring smaller companies, speed is a competitive advantage. Using special purpose vehicles (SPV) allows the firm to structure investment entities quickly, reducing overhead and enabling them to capture compelling opportunities before larger firms can act.

Furthermore, continuation vehicles (CV) have emerged as a vital lever for managing “unrealized value” in high-performers, with 40% of GPs now using them to provide liquidity without a full exit.

After the deal, the challenge shifts to integrating the new company's financials, often requiring purchase price allocation, and updating the cap table. This reinforces the need for a unified platform to maintain a clear view across the growing portfolio and ensure the combined entity operates seamlessly.

Driving value through human capital and ownership

A value creation plan is only as strong as the team executing it. As Narayanan explains, “The critical point of failure is if you have the right people...if you don't have the right leader for revenue or sales or marketing or product, your plans are going to fail.”

To solve this, PE firms are increasingly using performance-based equity to align management with fund goals. Carta data from 2025 shows the depth of this integration: When PE firms issue equity grants with performance conditions, about 52% of those conditions are linked directly to metrics that measure financial return for the owner, such as MOIC or IRR.

This ownership culture is expanding into the private wealth channel. As individual investors move toward a 15% allocation in private assets (up from 3%), firms must build intelligence infrastructure to educate this new class of LPs. The urgency to institutionalize these programs is growing as the private wealth channel expands. In APAC alone, the number of family offices actively investing in private markets has surged by 378% since 2019.

According to PE data, the percentage of PE-backed LLCs on Carta issuing equity to non-management employees grew from 25% in 2021 to 36% in 2023. This strategy is gaining traction, as seen with professional services firm Sikich, which expanded its employee ownership program after receiving a minority investment from PE firm Bain Capital. The firm recognized that to drive acquisitions and retain top talent, it needed to evolve its approach to compensation.

However, managing these equity plans, especially for LLCs with complex structures like profits interest, can be operationally challenging. Structuring these incentive plans correctly is crucial for success.

How to measure and report value creation

In a “K-shaped” recovery, LPs are no longer satisfied with "paper gains" (TVPI). For the first time since 2015, sponsor distributions have exceeded capital contributions, making DPI (distributed to paid-in capital) the primary predictor of a firm’s survival.

The demand for visibility is also a directive from the industry’s largest players. Speaking at the NEXUS 2026 event, Marcie Frost, CEO of CalPERS—the largest public pension plan in the U.S. with $613.65 billion in assets— emphasized that managers providing "greater levels of underlying investment data" would help the pension better manage its risk. While private markets are private for a reason, Frost noted that if a portfolio is not outperforming public markets, it must be questioned.

Bridging the gap between daily portco operations and these high-level financial metrics requires a cohesive value creation story. The process follows a logical hierarchy:

  1. Portco KPIs: Tracking the ground-level metrics defined in the VCP (e.g., CAC, EBITDA margin).
  2. Portfolio valuation: Translating those operational wins into data-driven valuations.
  3. Fund-Level metrics: Aggregating these valuations and exit cash flows into the IRR and DPI figures reported to LPs.

Connecting portfolio performance to fund returns

LPs are no longer satisfied with paper gains. While traditional PE funds of a 2023 vintage delivered a 1.02x median net multiple, multi-asset continuation funds delivered 1.47x. This outperformance justifies the move toward innovative fund structures.

Carta's Portfolio Valuations service provides PE firms with reliable, data-driven valuations that reflect the true progress of their value creation efforts. This gives both the firm and its auditors confidence in compliance and the reported numbers and ensures that the value being created is accurately measured and communicated.