Capital has become commoditized with thousands of PE firms competing. The old model of buying low and selling high with minor tweaks no longer works. True value creation has shifted to hands-on operational improvements that drive long-term growth, a skill many investors lack.

The old PE model is obsolete in software. With high revenue multiples (7-8x) and low leverage (30% debt), firms must genuinely grow the business to generate returns. About two-thirds of value now comes from selling a larger, more profitable company (terminal value), not from stripping cash flow.

When market competition compresses returns, PE firms that rigidly stick to historical IRR targets (e.g., 40%) are forced to underwrite increasingly risky deals. This strategy often backfires, as ignoring the elevated risk of failure leads to more blow-ups and poor fund performance.

Private Equity value creation has evolved. In the 2000s, it was driven by leverage; in the 2010s, by digital transformation. Today, AI serves as the new foundational "operating system" for growth, embedding intelligence into every process, contract, and customer touchpoint to drive returns.

The unprecedented 3-4 year drought in private equity liquidity has fundamentally broken traditional Limited Partner models. LPs, who historically planned on a 4-year cash flow cycle for receiving distributions, are now facing an 8-9 year cycle, creating immense pressure on their allocation and return models.

The era of generating returns through leverage and multiple expansion is over. Future success in PE will come from driving revenue growth, entering at lower multiples, and adding operational expertise, particularly in the fragmented middle market where these opportunities are more prevalent.

Private equity funds, driven by IRR targets and fund lifecycles, often pass up good exit opportunities in hopes of maximizing returns later. This can backfire if the market turns. A better strategy is to sell opportunistically into a rising market, even if it feels early, rather than risk missing the window.

To generate returns on a $10B acquisition, a PE firm needs a $25B exit, which often means an IPO. They must underwrite this IPO at a discount to public comps, despite having paid a 30% premium to acquire the company, creating a significant initial value gap to overcome from day one.

In today's crowded market, the key PE differentiator is no longer financial engineering but the ability to identify and cultivate relationships with target companies months or years before a sale process. This provides the necessary time for deep diligence and strategic planning.