PE's New Era: From Financial Engineering to Operational Excellence

PE INTELLIGENCE BRIEFING

The Shifting Sands of Value Creation: From Financial Engineering to Operational Grafters

THIS WEEK'S INTELLIGENCE

📊 10 episodes across 5 sources

⏱️ 6.5 hours of conversation with operators, GPs, and advisors

🎙️ Featuring: Howard Marks, Jan Hatzius, Brad Jacobs, Todd Graves

The signal from the noise. Here's what matters.

The drumbeat of 2025 is clear: the era of easy money and multiple expansion is over. The smart money isn't just saying it; they're demonstrating a profound shift in how value is created. We're seeing a decisive pivot from financial engineering to granular operational excellence. GPs and operators are rolling up their sleeves, diving deep into cost accounting, supply chain optimization, and human capital alignment to generate returns. Exits remain a challenge, pushing hold periods longer, and forcing a renewed focus on EBITDA growth from within. LPs are watching closely, becoming more selective, and demanding transparency and demonstrable operational uplift.

This week's intelligence reveals a market grappling with higher rates, a cautious but opportunistic appetite for private credit, and a corporate governance landscape increasingly influenced by AI and geopolitical factors. Here's what you need to know.

The Operational Playbook is the New Investment Thesis

Granular EBITDA Growth Trumps Multiple Arbitrage

The Situation: The days of simply buying low and selling high on a multiple turn are fading. Higher interest rates and a more competitive fundraising environment mean GPs must demonstrate tangible operational improvements to drive returns. This requires a much deeper engagement from the private equity sponsor, extending far beyond capital deployment.

The Intelligence: The conversations this week consistently highlighted a shift towards fundamental operational value creation. Eric Wiklendt of SpeySide Equity laid out a playbook for $100M+ manufacturing businesses centered on "fix and build" strategies, addressing poor cost accounting, rationalizing product lines, and aligning human capital. This isn't theoretical; it's about getting into the weeds of a P&L. Many companies, especially in the lower middle market, lack the sophistication to truly understand their own cost base, leading to mispricing products and eroding margins. The opportunity for private equity is to bring that discipline. Brad Jacobs, the serial entrepreneur, echoed this, emphasizing the importance of deep organizational design and financial management for creating enduring value, not just short-term gains.

The Voice:

"Cost accounting is a big one and it's kind of in the middle of a stack up issue... If you don't know what it costs to make something, how can you effectively sell it?" — Eric Wiklendt, The Private Equity Podcast

The Numbers: Companies in the lower middle market often leave 5-10% of EBITDA on the table due to inefficient operations or suboptimal product mix, representing a significant opportunity for hands-on PE firms.

The Implication: GPs need to staff up on operational expertise or rigorously partner with operators who can execute these playbooks. Value creation plans can no longer be generic; they must be tailored and deeply embedded in the execution strategy post-acquisition. For LPs, scrutinize how prospective GPs differentiate their operating capabilities.

Private Credit's Ascent: A Double-Edged Sword for PE

The Situation: Traditional bank lending for leveraged buyouts continues to pull back, creating a void increasingly filled by private credit. This market has matured significantly, offering new avenues for financing deals, but also introducing new complexities for deal sponsors.

The Intelligence: Howard Marks, reflecting on the evolution of credit markets, noted the explosive growth of private credit, comparing it to the nascent high-yield market decades ago. This expansion provides a critical liquidity channel for PE deals, especially in an environment where banks are more constrained. However, Ian Charles of Arctos Partners suggested that while private credit offers flexibility, it also points to increasing complexity and opacity within the PE ecosystem. GPs are finding themselves navigating a more fragmented and often more expensive financing landscape, putting pressure on entry multiples and overall deal economics. The "fix and build" thesis is critical here, as higher financing costs necessitate higher operational returns.

The Voice:

"The first of these big changes that's occurred, and is still occurring, is the growth of the non-bank credit market. Of course, principally private credit." — Howard Marks, Capital Allocators

The Numbers: The private credit market has swelled to over $1.5 trillion, becoming a dominant force in corporate debt financing for non-investment grade companies, often at higher rates (SOFR + 500-1000 bps) than syndicated loans.

The Implication: PE firms must be adept at sourcing and negotiating private credit, understanding its nuances, and factoring higher servicing costs into their investment models. LPs should understand the risk-return profile of private credit exposure within their commingled funds, particularly as it moves beyond purely senior secured positions.

Corporate Governance in the Age of AI and Geopolitics

The Situation: Corporate boardrooms are no longer just focused on financial performance. They are grappling with rapidly evolving technological disruptions, increasing regulatory scrutiny, and a politicized operating environment.

The Intelligence: David Berger's year-end reflections on corporate governance highlighted AI's "valuation bubble" despite its transformative potential. Directors are being pressured to understand and integrate AI responsibly, manage data privacy, and navigate the ethical implications. Beyond tech, the trend toward Public Benefit Corporations (PBCs) and dual-class shares continues to reshape board structures, adding layers of complexity for private equity looking at de-SPACs or take-private transactions. The focus on corporate purpose beyond profit, driven by both societal demands and regulatory shifts in places like Delaware, impacts deal diligence and future exit optionality.

The Voice:

"From a technology standpoint, I don't think we're in a bubble. From a valuation standpoint, we may be very well in a bubble." — David Berger, Boardroom Governance

The Numbers: A recent survey indicated over 60% of directors feel unprepared to oversee AI implementation risks, yet 85% expect AI to be a top priority for their boards in the next 12 months.

The Implication: Due diligence needs to extend to a company's readiness for AI integration, its governance structure beyond typical financial metrics, and its alignment with broader stakeholder considerations. GPs acquiring companies with complex governance structures need to have a clear plan for managing these complexities through the hold period.

LP Sentiment: Selective, Scrutinizing, and Seeking Specialization

The Situation: LPs, facing denominator effects and a more constrained capital environment, are becoming increasingly discerning in their allocations, favoring proven performance and clear differentiation.

The Intelligence: Ian Charles and Tim Sullivan both emphasized the increasing complexity of the private equity landscape for LPs. The market is consolidating, with larger, more diversified firms gaining an advantage, but LPs are still looking for specialized expertise. Sullivan, reflecting on Yale's decades of investing, highlighted that "success begets success" in venture capital, pointing to the power law dynamics where only a few top-tier managers generate outsized returns. LPs are prioritizing re-ups with these top performers and being highly selective with new managers, scrutinizing their value creation capabilities beyond financial engineering. They want to see how GPs are actually building durable businesses.

The Voice:

"It is such a feedback loop business where success begets success. The best venture firms would attract the best entrepreneurs. And the best entrepreneurs would go to the best venture firms." — Tim Sullivan, Capital Allocators

The Numbers: Many LPs are looking to reduce their number of GP relationships, often consolidating capital with fewer, larger, and more diversified funds that can offer a broader suite of products, but still demand niche specialization within their core competencies.

The Implication: GPs need an airtight narrative on their value-creation strategy and demonstrable track record. For emerging managers, finding a defensible niche and showing tangible operational results is paramount. LPs should continue to press for transparency on both financial and operational metrics, ensuring their capital is working for them.

DEAL FLOW SIGNALS

🔥 Active: Lower-middle-market manufacturing with clear operational upside (SpeySide Equity). AI-driven infrastructure and enabling technologies, despite valuation concerns (Goldman Sachs, Boardroom Governance). Consumer brands with strong unit economics and lean operational models (Raising Cane's, SkinnyDipped narratives).

🧊 Quiet: Highly leveraged deals without clear operational value-add (Howard Marks). Generic software plays lacking proprietary tech or defensible moats (Market consensus). Large-cap M&A without strategic rationale beyond market share (General market sentiment).

👀 Emerging: Companies leveraging "positive mindset" and strong internal culture for competitive advantage (Brad Jacobs, Ric Elias). Specialized credit solutions for non-bank borrowers (Howard Marks). Niche consumer categories challenging established incumbents (SkinnyDipped).

⚠️ Stressed: Companies with poor cost accounting or bloated SG&A in a rising rate environment (SpeySide Equity). Legacy businesses unable to adapt to evolving governance expectations (Boardroom Governance). Any venture-backed enterprise that lacks a path to profitability and relies solely on capital raises (Tim Sullivan).

THE OPERATOR'S EDGE

1. "One Thing" Focus for Brand Building: Todd Graves of Raising Cane's attributes their runaway success to an unwavering focus on "one thing" – perfect chicken fingers, fries, sauce, and toast. Operators in any sector can apply this by relentlessly perfecting their core offering before attempting diversification. This drives consistency, simplifies operations, and deepens brand loyalty. Source: How I Built This with Guy Raz
2. Lean Innovation & Capital Scarcity: Breezy and Val Griffith of SkinnyDipped demonstrated how necessity breeds invention. Forced by tight capital, they innovated processes in their kitchen that later scaled. This suggests portfolio companies should be challenged to find "bootstrap" solutions for innovation before significant capital spending, fostering efficiency and resilience. Source: How I Built This with Guy Raz
3. Human Capital Alignment as a Value Driver: Eric Wiklendt stressed that in manufacturing, it’s not just about machines; it's about people. He focuses on aligning human capital with company goals and creating transparency. This extends to leadership development, incentive structures, and ensuring employees understand their role in value creation. For portfolio companies, investing strategically in talent management can unlock significant operational leverage. Source: The Private Equity Podcast, by Raw Selection
4. Culture as a Competitive Advantage: Ric Elias of Red Ventures and Brad Jacobs both highlight how intentional culture building directly impacts long-term value. Elias spoke of fostering "well-being" and purpose, while Jacobs emphasized "positive mindset" and clarity. For operating partners, this means actively shaping company culture and communication strategies, not just processes, as a key differentiator. Source: Invest Like The Best, Founders

THE CONTRARIAN POSITION

While many in PE are chasing the largest, most diversified funds or specialized tech, Eric Wiklendt of SpeySide Equity is finding opportunity in overlooked lower-middle-market manufacturing. He explicitly states that "the biggest challenge [he sees] in private equity is lack of focus and concentration." He contends that many PE firms, despite preaching specialization, are too broad in their investment criteria, missing the deep operational inefficiencies that drive his "fix and build" strategy in specific industrial niches. In a crowded market, his contrarian view is to go smaller, go deeper, and focus intensely on sectors where basic operational improvements can generate outsized returns.

THE BOTTOM LINE

The market is rewarding operational grafters. If you're not deeply engaged in value creation beyond financial leverage, your returns will suffer. Watch for GPs who are demonstrably embedding operational expertise into their teams and LPs who are pressing for clear, executable value creation plans. The easy money is gone; the smart money is working.

📚 APPENDIX: EPISODE COVERAGE

1. How I Built This with Guy Raz: "Advice Line with Todd Graves of Raising Cane's"

Guests: Todd Graves (Founder & CEO, Raising Cane's) Runtime: 1 hour, 6 minutes | Vibe: Inspiring, practical, entrepreneurial wisdom live

Key Signals:

• Unwavering Focus: Graves emphasizes that Raising Cane's success comes from relentless focus on one thing (chicken fingers) to achieve consistency and quality, rather than diversifying the menu. This showcases the power of specialization in a competitive market.
• Capital Efficiency & Growth Discipline: He advises founders on creative financing, managing working capital, and disciplined growth, pushing back on the idea of rapid expansion without solid unit economics. This highlights practical cash flow management for scaling businesses.
• Brand Authenticity: Graves stresses the importance of an authentic brand story and mission (the "love story" of the dog Cane) that resonates with customers and employees, which is crucial for building lasting consumer loyalty.

"If you try to be all things to all people, you're not really going to serve any of them very well."

2. The Private Equity Podcast: "An investors value creation plan for $100M+ revenue companies"

Guests: Eric Wiklendt (Managing Director, SpeySide Equity) Runtime: 35 minutes | Vibe: Granular, operational, lower-middle-market deep dive

Key Signals:

• "Fix and Build" Strategy: Wiklendt details his value creation approach for manufacturing businesses, focusing on improving existing operations and capabilities rather than solely relying on external growth. This involves deep dives into cost accounting, operational efficiencies, and supply chain.
• Human Capital Alignment: A critical part of his strategy is aligning people and their skills with strategic goals, especially in companies that have outgrown their original entrepreneurial management. He identifies people as a key leverage point for EBITDA growth.
• Transparency in Due Diligence: Wiklendt advocates for brutal honesty during diligence about what can be fixed and what needs to be fixed, avoiding over-optimistic projections based on a lack of operational understanding.

"The biggest challenge I see in private equity is lack of focus and concentration."

3. Capital Allocators – Inside the Institutional Investment Industry: "Top 5 of 2025: #1: Howard Marks"

Guests: Howard Marks (Co-founder, Oaktree Capital Management) Runtime: 52 minutes | Vibe: Reflective, insightful, market history meets future trends

Key Signals:

• Evolution of Credit Markets: Marks provides a historical perspective on the growth of private credit, comparing its current development to the emergence of the high-yield bond market decades ago. This signals a permanent shift in capital markets.
• Valuation and Risk Assessment: He reiterates his core philosophy of buying things "well" rather than simply buying "good things," emphasizing the critical role of valuation and risk management in successful investing. This is a timeless lesson for all dealmakers.
• Oaktree's Journey & Memos: Marks discusses Oaktree's transition to a public company and the process behind his widely read investment memos, highlighting the importance of clear, disciplined communication of investment philosophy.

"Successful investing is not a matter of buying good things, but buying things well."

4. Boardroom Governance with Evan Epstein: "David Berger: Year-End Reflections on Corporate Governance and the Road Ahead"

Guests: David Berger (Partner, Wilson Sonsini), Evan Epstein (Host) Runtime: 35 minutes | Vibe: Forward-looking, critical, corporate governance trends

Key Signals:

• AI's Governance Challenges: Berger discusses the "AI bubble" from a valuation perspective and the growing pressure on boards to understand AI's implications, manage its risks, and strategize for its adoption responsibly. This is a crucial new area for PE diligence.
• Dual-Class Shares & PBCs: The conversation covers the increasing prominence of dual-class share structures and Public Benefit Corporations, noting the complexities they introduce for traditional governance models and investor rights. This impacts deal structuring and exit optionality.
• Delaware Governance Landscape: The episode highlights ongoing challenges and changes within Delaware's corporate legal framework, which remains central to US corporate governance. This affects legal advisors and deal terms.

"From a technology standpoint, I don't think we're in a bubble. From a valuation standpoint, we may be very well in a bubble."

5. Capital Allocators – Inside the Institutional Investment Industry: "Top 5 of 2025: #2: Ian Charles"

Guests: Ian Charles (Co-Founder & Partner, Arctos Partners) Runtime: 49 minutes | Vibe: Strategic, forward-thinking, GP/LP ecosystem perspective

Key Signals:

• PE Firm Complexity: Charles argues that most market participants underestimate the operational and strategic complexity of PE firms themselves, particularly as they grow and diversify. This means GPs need to manage their own businesses with the same rigor they apply to portfolio companies.
• Quantitative Sentiment Analysis: Arctos's "Now Narratives" tool, using sentiment analysis from hundreds of interviews, provides a unique lens into what GPs and LPs are truly concerned about. This reveals the shifting priorities and anxieties within the asset class.
• Consolidation & Specialization: He identifies a trend towards consolidation among larger, more diversified PE firms that can offer a broader range of products, while simultaneously acknowledging the need for managers to maintain specialized expertise in their core areas.

"I don't think most market participants appreciate or understand how complex these businesses are. The management company, the GP, that is a complex business and as the firms grow and mature, that comp..."

6. Odd Lots: "Goldman's Hatzius and Snider on the Outlook for 2026"

Guests: Jan Hatzius (Chief Economist, Goldman Sachs), Ben Snider (Chief US Equity Strategist, Goldman Sachs) Runtime: 40 minutes | Vibe: Macro, predictive, institutional economic forecast

Key Signals:

• Strong Corporate Earnings (Ex-Mega-Caps): Snider points out that even stripping out the "Magnificent Seven," median S&P stock earnings growth has been robust (around 10%), suggesting underlying economic strength beyond tech giants. This indicates a broader opportunity set for PE.
• AI's Measured GDP Impact: Hatzius notes that while AI investment is significant, its direct contribution to measured GDP growth has so far been relatively small (around 20 basis points). This tempers hype with a realistic view of economic integration timelines.
• Persistent Inflation Drivers: The discussion hints at ongoing inflationary pressures from geopolitics, supply chain shifts, and tariffs, which will continue to impact operating costs and pricing strategies for portfolio companies.

"What's underappreciated is just how strong corporate earnings growth has been. Even if we strip out the mega caps, the median S and P stock reported earnings growth of about 10%."

7. How I Built This with Guy Raz: "SkinnyDipped: Breezy and Val Griffith. The Flourishing Snack Company That Almost Failed"

Guests: Breezy Griffith, Val Griffith (Co-founders, SkinnyDipped) Runtime: 55 minutes | Vibe: Resilient, innovative, CPG startup journey

Key Signals:

• Disrupting Incumbent Mindsets: The founders challenged the notion that consumers only want overly sweet snacks, proving that a healthier, less-sweet option could capture significant market share. This highlights opportunity in overlooked consumer preferences.
• Bootstrapped Innovation: Their journey involved extensive kitchen-based R&D, overcoming production challenges with limited capital before securing major retail deals. This underscores the power of lean innovation in CPG before significant investment.
• Resilience Through Adversity: The narrative details numerous near-death experiences (rancid almonds, financial struggles) and emphasizes the grit required to build a successful brand. This is a testament to entrepreneurial tenacity critical for PE operators.

"what if you used less sugar, not fake sugar — and a thin coating of chocolate instead of a fat one?"

8. Capital Allocators – Inside the Institutional Investment Industry: "Top 5 of 2025: #3: Tim Sullivan"

Guests: Tim Sullivan (Former Head of PE, Yale Investments Office) Runtime: 47 minutes | Vibe: Historical, educational, institutional investing wisdom

Key Signals:

• Operational Value vs. Financial Engineering: Sullivan differentiates between "financial engineering" (a commodity) and genuine operational improvements as the path to sustainable value creation. This validates the renewed focus on hands-on company building for GPs.
• Power Law of Venture Returns: He highlights that a small number of top-tier venture firms generate the vast majority of returns due to a feedback loop of success attracting the best entrepreneurs. This informs LP allocation strategies towards proven managers.
• Long-Term Perspective on PE Evolution: Sullivan's 39-year tenure at Yale provides a unique historical lens on the crowding and maturation of the private equity market, emphasizing the increasing difficulty of finding uncorrelated alpha.

"Financial engineering is a commodity. Wall Street was teaching lots of people how to do fancy things to balance sheets. But could you then do something with the business when you owned it to make it a..."

9. Founders: "#408 How to Make a Few MORE Billion Dollars: Brad Jacobs"

Guests: Brad Jacobs (Serial Billionaire Entrepreneur) Runtime: 1 hour, 32 minutes | Vibe: High-energy, actionable, entrepreneurial blueprint

Key Signals:

• Systematic Acquisition & Integration: Jacobs outlines his repeatable playbook for identifying, acquiring, and integrating businesses, focusing on meticulous financial management, operational efficiencies, and cultural alignment post-M&A. This is a masterclass in platform acquisition strategy.
• Organizational Design & People Management: He emphasizes that building successful companies is ultimately about designing effective organizations and empowering top talent. This highlights the centrality of human capital in scaling businesses for PE.
• Mindset & Emotional Resilience: Jacobs stresses the importance of a positive mindset and emotional fortitude to navigate the inevitable challenges of entrepreneurship and business building. This points to the often-underestimated psychological aspect of leadership.

"For me, creating shareholder value isn't just financial. It's about bringing something extraordinary into existence from absolutely nothing."

10. Invest Like the Best with Patrick O'Shaughnessy: "Ric Elias - The Art of Living Well - [Invest Like The Best, CLASSICS]"

Guests: Ric Elias (CEO & Co-founder, Red Ventures) Runtime: 59 minutes | Vibe: Philosophic, introspective, leadership beyond profit

Key Signals:

• Purpose-Driven Culture: Elias articulates how building a company culture centered around purpose and individual well-being contributes directly to long-term success and employee retention. This is a non-traditional yet powerful value lever.
• "Being" vs. "Doing" in Leadership: He distinguishes between constant activity ("doing") and a state of grounded presence ("being") as crucial for effective leadership and sustainable personal energy. This highlights the importance of mental fortitude for PE operators.
• Resilience and Forgiveness: Inspired by his "Miracle on the Hudson" experience, Elias shares insights on the power of forgiveness and resilience, which are critical traits for navigating the inherent risks and setbacks in entrepreneurial ventures.

"My big dream is to live in a state of well-being most of the time and to have a sense of lifelong satisfaction when the end comes. So it's really very internal versus something that gets accomplished ..."