New Private Equity Playbook: Quality Rather Than Bargains

Raphaëlle d'Ornano
8 min readMar 20, 2024


Private Equity is entering a new era. Strategies for both growth investing and buyouts are undergoing a dramatic evolution that will require a new playbook for the next decade.

Though PE investing is never easy, the ground rules from 2008 until now have been relatively stable thanks to low interest rates following the financial crisis. That led to a boom in PE as GPs used abundant and cheap debt to embark on acquisition sprees. Falling interest rates cut the cost of capital and raised asset values. Per a recent McKinsey & Company report, approximately two-thirds of buyout returns on assets entered in 2010 or later and sold prior to 2022 were the result of financial leverage and multiple expansion.

Higher interest rates, inflation, and geopolitical uncertainties have scrambled that strategy. The industry must go back to its roots by sourcing good deals and making operational improvements to fuel returns. Though this is not new, it nonetheless represents a new paradigm.

This is not temporary. This requires a new playbook for the next decade.

The fundamental goals remain unchanged: Win deals and deliver the best returns. Tech remains one of the most promising sectors for doing this. The herd of VC backed companies that grew over recent years is a good field of opportunity.

Here is where PE managers need to transform their thinking, especially when it comes to tech assets. It’s no longer about finding cheap assets. It’s about finding high-quality assets, or assets with the potential to become high-quality assets.

The key is to focus on operating leverage rather than financial leverage. To successfully drive operating leverage, PE must transform companies by improving their performance so that margins expand as revenue grows.

Only the very best companies will have the right models and revenue dynamics to benefit from a savvy investor who understands operating leverage. So, when it comes to tech, there is going to be a premium to pay to get into the game. The entry point investment or acquisition cost will be higher, a challenge to that classic buyout mindset. PE investors can perfectly play the game and demonstrate strong conviction as demonstrated in recent technology buyouts.

PE managers need to have an operational value creation playbook that gives them a framework for identifying the right companies and for achieving the efficiencies that will drive higher multiples.

That playbook should have four critical components:

1) Organic growth

As growth becomes harder in light of challenging macroeconomic conditions, it is critical to understand the levers behind a company’s growth to be able to pull the right ones at the right time to accelerate the business.

Gaining an understanding of the key elements of company’s growth equation is the first step to long-term revenue growth. This growth equation defines the relationship between the variables that collectively drive a company’s growth.

Every business model, tech or non tech, has a growth equation that generates the metric by which the quality of growth can be measured. When it comes to SaaS, the ARR is the key metric revealed by this equation. For other businesses, it may be the gross or contribution margin aspect of the formula.

Let’s take the example of an Enterprise SaaS business, which grows in one of two ways: either top-down through a sales-led strategy (e.g. Salesforce) or bottom-up product-led strategy (e.g. Figma).

Depending on which of these models are in place, some levers will be more important than others. In both cases, ARR growth is the result of the following equation:

- ARR N = New ARR + Expansion ARR + Resurrected ARR — Contracted ARR — Churn ARR

Each of the variables in that equation must be examined to gain sufficient insight into the potential for ARR growth. This is not an easy exercise because it is critical to dive into the specificities of a company’s business model (i.e. go-to-motion, customer segment, pricing, etc. in the case of Enterprise SaaS).

For the sales-led growth company, new and Expansion ARR will depend on the number of leads and their effective conversion. Focusing on sales efficiency metrics will be critical because it is the root of ARR growth,

For a product-led growth company, these same ARR factors will depend on the number of users and their attached pricing. In this second case, the focus should be on metrics like visitors and their conversion rate into paying users.

Once the growth equation is clear, the next step is to ensure that the company has a high-quality growth engine.

Can it demonstrate sufficient strength behind the critical variables in the growth equation? Does the company have an efficient sales force? Is it able to attract and convert users to its product?

Within our Advanced Growth Intelligence framework at the firm, we define this as a “Quality of Growth”. It is not only about the ARR or revenue numbers, but about the actual levers behind those numbers.

Only if they are strong is growth sustainable over the long-term.

Finally, private equity managers should help their portfolio companies build stronger revenue streams. By this we mean revenue that has a higher “recurrence” and “technological” factor to them which leads to more predictable and higher-margin growth. Embedding technology within a company’s operations — so as to make every company a tech company — is a clear way to do that.

Even though multiple expansion is not an obvious route to private equity returns in today’s environment, improving “Quality of Revenue” allows to approach it justify and validate that investment.

2) Preventing Margin Leakage

Once investors are confident about top line revenue items, then a clear assessment should be made on the operating expenses structure and how that impacts the gross margin/contribution margin and on the operating expense structure.

Gross margin is perhaps the most critical aggregate measure for a SaaS business: it indicates to what extent the solution is scalable. Gross margin leakages frequently arise from inadequate technical infrastructure or high customer support costs.

Contribution margin is the equivalent for non-SaaS businesses. Leakages here arise from disproportionate costs of inputs to reach sales levels. In the case of Consumer Tech, leakages may arise from the high fees made to payment providers, for example. In the case of DTC brands, leakages may arise from high supply costs that the company is not able to pass on to the end customer when they suddenly increase. This is one of the reasons why so many DTC brands have suffered from the macroeconomic environment in the recent period.

In general, there are three key expenses that can have the biggest impact on margins.

Let’s start with G&A expenses. These refer to fixed expenses necessary to run a company’s operations, which are not directly correlated to the effective level of sales. G&A expenses are the easiest to control. Yet they are a common source of leakage as high-growth, VC-backed companies overspend to build a lavish image on items like fancy offices in high-rent buildings.

More complicated to control are R&D and S&M spending. Technology companies are characterized by a high level of operating expenses due to the investments needed in both R&D and S&M to sustain growth (or high-growth).

R&D expenses often are the second most important source of spending (behind S&M) for technology companies. R&D expenses (including Product) should be broken down between innovation and maintenance. Both are critical. But they have different triggers. Innovation expenses can be capped or cut if ROI is not effectively demonstrated on the new product/features arising from them. Maintenance expenses can be reduced through R&D overhaul.

Note that a portion of these should be within gross margin for software businesses, and that margin leakage at R&D level should be assessed based on the right aggregates.

That brings us to S&M expenses. In our recent report on the characteristics of the most efficient high-growth SaaS companies, S&M accounted for 34% median LTM as a % of LTM Revenue.

This is where technology companies, especially high-growth ones, have historically experienced (very) strong margin leakage. This is true both at sales and marketing levels: low quotas and poor attainments on the one hand, and marketing efforts not targeted and measured enough on the other hand.

3) Harnessing the power of GenAI

GenAI is becoming an increasingly essential part of this new operating leverage playbook. We recently did a deeper dive into GenAI for PE investors here. But let’s highlight a couple of key lessons in the context of the playbook.

First, GenAI has tremendous potential to reduce operating expenses by bringing new technical efficiencies to G&A, S&M and R&D expenses that we explored above. The productivity gains could be massive — but also challenging to protect at this early stage of development.

Beyond that, GenAI could enable in greater transformation through new revenue opportunities and business models. For instance, GenAI could automate pricing personalization that captures the incremental value brought to the customer.

But at the same time, GenAI can create its own new costs which, if not carefully managed, could cancel out those upsides.

So, PE investors need insight into how GenAI is being deployed so they can gain a clear understanding of how these structural changes could affect margin levels.

4) Avoiding external chocs

Creating strong operational leverage depends on pushing the right levers internally. But any gains could be at risk if PE managers and executives don’t identify and limit the potential impact of external shocks.

These chocs include GenAI transformation, climate change, and macro and geopolitical impacts. All of these are factors that no investor can ignore when building the company’s value creation plan and forecasting revenue and margins over the long term.

Just as we see benefits from GenAI for savvy companies deploying it internally, it represents a potential black swan moment for companies that fail to adapt swiftly to competitors that do embrace it.

Climate change also remains a threat. Putting aside the debate about ESG that has caused waves in the investment world, climate change is a reality and is already hurting margins. Whether or not a company takes into account and reduces the financial impact of Scope 1 and Scope 2 emissions — at least in line with the SEC’s recent recommendations — can often explain strong margin differences between companies.

Finally, it’s important to know where a company might be vulnerable to macroeconomic and geopolitical turmoil. Are there costs that are sensitive to inflation? Will sales take a hit if price increases are required? Could supply chains be disrupted by conflicts?

To some degree, these elements are outside of the control of investors and companies. But understanding the exposure and whether there is a risk management plan has to be part of the operating leverage playbook.


Pivoting from a focus on financial to operating leverage starts with adopting a new mindset. But success will depend on insight that allows for better execution. These four components of this new playbook represent a strong foundation for accelerating this strategic change.

Once the plan is set, investors will gain clarity on which metrics to track, how to define them accurately so they reflect the unique business characteristics of a company, and setting realistic goals. No deal is without risk, but having a well-defined end goal and a detailed plan to reach it significantly increases the odds of success.

Whenever an industry reaches this kind of crossroads, changing direction can feel daunting. But remember this: Mastering the playbook of operational leverage will allow private equity managers to stand out from the crowd and create the kind of differentiation that makes them more attractive to future investors.



Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.