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The true drivers of Private Equity performance: Beyond conventional wisdom
Private equity performance is often discussed as though leverage does all the heavy lifting. In reality, leverage amplifies an outcome—it does not generate it. What truly differentiates an average fund from a consistent outperformer is the ability to identify the right companies and then execute a tangible value-creation plan: operational transformation, governance enhancement, buy-and-build strategies, and ESG integration. And because performance is also determined in the details, disciplined structuring (including the equalisation premium) is essential to ensure that theoretical performance translates into performance genuinely realised by investors.
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The real performance drivers in private equity: beyond common misconceptions
Leverage: a multiplier, not a value creator
In the collective imagination, private equity is often associated with leverage—this ability to amplify returns through debt. Yet while leverage can indeed boost performance in a low-rate environment, it is not the main driver. Quite the opposite: it accelerates risks as much as gains.
In an environment where rates are higher and banks tighten their criteria, poorly managed leverage can even become a drag.
The real question, therefore, is not “how much debt should we use?”, but “how do we create value beyond leverage?”. And that is where the difference lies between a top-performing fund and an average fund.
Key takeaway
Leverage can amplify performance, but it does not create it: value creation happens elsewhere.
The transformational effect: the core of value creation
What sets the best funds apart is their ability to transform the companies they support in depth. This “transformational” approach rests on several pillars:
Operational optimization: cost rationalization, process improvement, and upskilling teams.
Governance: implementing clear decision-making structures aligned with growth objectives.
Build-up strategy: targeted acquisitions to strengthen the company’s competitive position.
Integrating ESG criteria: not as a constraint, but as a lever for long-term performance.
Unlike a purely financial logic, the funds that excel act as strategic partners, involved in the company’s life well beyond capital injection. The data confirm it: teams with deep sector expertise and dedicated operating partners consistently outperform their peers.
Asset selection: the art of spotting hidden potential
While market timing can play a role, it can never compensate for poor company selection. The top-performing funds are those that can identify businesses with latent transformation potential—even in less favorable sectors or cycles.
This capability relies on:
A strong network to access off-market opportunities.
A sharp assessment of management teams and their ability to adapt.
A long-term view to anticipate growth levers (innovation, international expansion, etc.).
In other words, a great company in an average market is better than an average company in a booming market.
The winning trio: sourcing, structuring, transforming
Performance is not decided at exit, but from the moment you invest. Three key steps make the difference:
1. Deal sourcing: finding the right opportunities, often before they hit the market, through a strong reputation and a clear sector positioning.
2. Deal making: structuring the transaction intelligently: balanced valuation, protective clauses, and alignment of interests with management.
3. Deal shaping: anticipating value creation during due diligence. This means defining a strategic roadmap, identifying the transformations required, and mobilizing resources (operating partners, sector experts) to execute them.
This trio enables best-in-class funds to create value where others merely invest.
Structuring details: distinguishing theoretical performance from performance actually experienced
The equalization premium (or subscription premium) is a key mechanism in private funds, designed to balance entry terms for investors subscribing at different times. It offsets the economic advantages of later subscribers (who benefit from value already created) and protects early investors (who bear the initial risk and the J-curve). Its effectiveness depends on rigorous calculation.
In the case of a fund of funds or a feeder fund, the subscription premium is particularly sensitive. By design, the master fund applies its own subscription premium, the feeder applies its own, and the two must be perfectly consistent.
This alignment aims to avoid any performance or governance distortion, especially in complex structures or long fundraising periods.
Key point
Value is created in the funds, but it is preserved through structuring—especially via rigorous treatment of the equalization premium.
In short, it is an equity tool—but only if it is properly structured and clearly explained.
In practice: what investors should remember
Performance does not come from debt, but from transformation: a fund that relies on leverage without a value-creation plan takes a major risk.
Selection matters more than timing: the best companies are not always the most visible. The challenge is to spot their potential and know how to activate it.
Value is built, not found: the funds that outperform are those that actively support their portfolio companies—from sourcing to exit.
The subscription premium is an essential fairness tool in private markets: but it is neither magical nor perfectly neutralizing, especially in multi-layer structures.
In summary:
In a world where market conditions evolve rapidly, the funds that prove resilient—and outperform—are those that have internalized this logic of active value creation.
For investors, the challenge is therefore to select managers capable of combining sector expertise, operational rigor, and a long-term vision.
Disclaimer
Private Corner is a company authorized as a portfolio management company on November 5, 2020, by the French Financial Markets Authority (AMF) under number GP-20000038.
Investing in alternative investment funds (AIFs) involves risks, including capital loss and liquidity risk. The funds invested are locked in for a minimum of 10 years.
Investment in the funds is reserved for professional or sophisticated investors.
Past performance is not indicative of future performance and there is no guarantee that the objectives will be achieved.
Finally, all information presented is the opinion and interpretation of Private Corner.
