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Private Equity

Private Equity Growth Strategies Are Shifting in Our Post-QE World

The ending of quantitative easing (QE) has had consequences for PE firms. The time when returns from a market multiple uplift were easy to come by has ended. This poses a challenge to PE firms who now require more EBITDA growth in order to pass their carry hurdle.

Since more than half of current global PE returns (58%) now come from multiple expansion, the shrinkage in valuations puts the whole industry under pressure. Organic growth, buy-and-build and operational improvements will now have to quickly become the performance-drivers.

You can find organic growth in all sectors

Organic growth is one of the underpinnings of private equity success, playing a vital role in sustainable value creation. Traditionally, you could expect organic growth in the private equity space to be concentrated in sectors such as TMT (Technology, Media, & Telecom), financial services or healthcare. But if your focus is solely on those verticals, the likelihood is you will fail to grasp the wealth of opportunities elsewhere.

Much outperformance takes place at the company level, with many fast-growing champions hiding out in lower-growth sectors and industries. For instance, more than a third of the fastest-growing companies with 15% organic growth CAGR operate in lower-growth industries (industrials, materials, consumer).

Digging deeper to compare sub-sectors such as retail and technology, will reveal that even though the organic growth rate is slower in retail, there are plenty of high-growth niches. More than a quarter (28%) of retail companies analysed have an organic growth rate of more than 15%. In contrast, even the fastest-growing tech subsector has a reasonable number of sluggishly performing assets with more than one in ten technology businesses (11%) having negative growth.

A buy-and-build strategy accelerates growth

In addition to organic growth, a large factor enabling you to grow your revenue is acquisitions. You often acquire smaller companies to grow faster. This add-on strategy is especially common among companies with private equity-backing.

Alongside growth, there are real scale benefits and operating synergies that help improve the margin profile. In fact, businesses engaged with continuous acquisitions managed to expand margins more than twice as much as companies that did not engage in M&A.

Add-ons work because smaller businesses trade at a lower multiple compared to larger ones. Over time, this multiple arbitrage helps companies boost their overall valuation. This type of value creation is especially important, given the current environment.

Fragmented markets present the best consolidation opportunities

We know that well-executed add-ons are lucrative, the question is where to find them. To examine this, we calculate the Herfindahl–Hirschman index on the basis of our dataset. This data method gives a good indication of the level of concentration of a pool of companies.

Overall, consolidation is most advanced in the financial services sector whereas services, consumer and TMT are most fragmented. 

Going one layer deeper and looking at the market concentration on a subsector level, the HHI index logically indicates less fragmentation. As expected, the construction, manufacturing and professional services subsectors are most fragmented, leaving more room for consolidation. In contrast, raw materials, biotechnology and insurance stand out as the most consolidated subsector.

Growth is not the only game in town, profitability and valuation also play a role

Growth needs to be weighed against other key investment criteria such as profitability and valuation. For example, VC-backed industries, such as shared mobility, fintech-banking or telemedicine and mobile health show high organic revenue growth but lack significant profitability.

Analysis we conducted found that less than 4% of total assets achieve an organic growth rate exceeding 15% and also deliver EBITDA margins of more than 20%.

The findings also reveal a steep correlation between multiples and growth. The conclusions to draw from this are that investment in high organic growth comes with a high price tag, and that trade-offs will probably be necessary. It has become vital to identify the right sweet spot so you can achieve enough deal flow.


Philipp Wank is Head of DACH Private Equity Intelligence at


The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group

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