Where Are Private Equity Returns Actually Coming From in 2026?

In the evolving landscape of private equity (PE), there’s a subtle but significant shift happening in conversations this year. The question on everyone’s mind is: where are the returns actually coming from? Traditionally, PE returns have been attributed to a combination of growth, margin improvement, leverage, and multiple expansion. However, the balance among these drivers is changing, and understanding this shift is crucial for anyone involved in global organisations, private equity firms, SMEs, startups, and M&A teams.

I want to take you through this transformation, breaking down each component of PE returns, explaining the current trends, and offering practical insights on how to navigate this new environment. This post will help you grasp where value is being created today and how to position your strategies accordingly.

Understanding the Four Pillars of Private Equity Returns

Private equity returns typically come from four main sources:

1. Growth - Increasing the top line through revenue expansion.

2. Margin - Improving operational efficiency to boost profitability.

3. Leverage - Using debt to amplify returns.

4. Multiple - Selling the business at a higher valuation multiple than the purchase price.

   
   

Each of these levers has its own dynamics and risks. Historically, PE firms have relied heavily on leverage and multiple expansion to drive returns. However, in the current market, these levers are under pressure, and growth and margin improvements are becoming more critical.

Growth: The Engine of Value Creation

Growth remains the most sustainable source of value creation. In today’s environment, organic growth is challenging due to inflationary pressures, supply chain disruptions, and geopolitical uncertainties. However, companies that can innovate, enter new markets, or expand their product lines are still able to drive meaningful top-line increases.

For example, a mid-sized technology firm I recently advised was able to grow revenues by 15% year-on-year by expanding into adjacent markets and investing in digital transformation. This growth was not just about increasing sales but also about enhancing customer experience and operational agility.

Growth strategies should focus on:

• Market expansion: Entering new geographic or demographic markets.

• Product innovation: Developing new offerings or improving existing ones.

• Customer retention and acquisition: Leveraging data analytics to understand and serve customers better.

  
  

Corporate growth in private equity

Margin Improvement: Driving Operational Excellence

Margin improvement is about making the business more efficient and profitable. This can be achieved through cost reduction, process optimisation, and better supply chain management. In the current inflationary environment, controlling costs without sacrificing quality is more important than ever.

I have seen PE firms focus on operational excellence programs that deliver 200-300 basis points of margin improvement within 12-18 months. These programs often include:

• Lean management techniques to eliminate waste.

• Automation and digitisation to reduce manual processes.

• Strategic sourcing to negotiate better supplier contracts.

  
  

Margin improvement not only boosts cash flow but also makes the business more resilient to economic downturns.

Leverage: The Changing Role of Debt

Leverage has traditionally been a powerful tool in private equity, allowing firms to amplify returns by using borrowed money. However, rising interest rates and tighter credit conditions are making leverage more expensive and less attractive.

In 2025, I observed a cautious approach to leverage. PE firms are focusing on sustainable debt levels and prioritising cash flow generation to service debt comfortably. This shift means that returns are less likely to come from financial engineering and more from genuine business improvements.

Multiple Expansion: A More Selective Approach

Multiple expansion occurs when a business is sold at a higher valuation multiple than it was purchased for. This can happen due to market sentiment, sector growth, or improved business fundamentals.

Currently, multiple expansion is more selective. Valuations are stabilising after a period of volatility, and buyers are more discerning. This means that PE firms must demonstrate clear value creation through growth and margin improvement to justify higher multiples.

Valuation multiples in private equity

The Subtle Shift in PE Conversations: What’s Driving Returns Now?

The subtle shift I’m referring to is the growing emphasis on growth and margin as the primary drivers of returns, with leverage and multiple expansion playing more supportive roles. This shift reflects broader economic and market realities:

• Higher interest rates reduce the attractiveness of leverage.

• Market volatility limits multiple expansion opportunities.

• Operational challenges require a focus on efficiency and innovation.

  
  

This means that PE firms and their portfolio companies must double down on operational improvements and strategic growth initiatives. Simply relying on financial engineering is no longer sufficient.

Practical Recommendations for Navigating the New PE Landscape

Given this shift, here are some actionable recommendations for organisations and PE teams:

1. Prioritise organic growth: Invest in market research, product development, and customer engagement to drive sustainable revenue increases.

2. Implement operational excellence programs: Use data-driven approaches to identify cost-saving opportunities and improve margins.

3. Manage leverage prudently: Avoid over-leveraging and focus on maintaining strong cash flows.

4. Prepare for selective multiple expansion: Build a compelling growth and margin story to attract premium valuations.

5. Leverage technology and digital transformation: These are key enablers of both growth and margin improvement.

   
   

By focusing on these areas, you can position your portfolio companies for success in the current environment.

The Role of Strategic IT Leadership in Driving PE Returns

One area that often gets overlooked in PE discussions is the role of strategic IT leadership. In my experience, technology is a critical enabler of both growth and margin improvement. Digital transformation initiatives can unlock new revenue streams, improve customer experience, and drive operational efficiencies.

For example, implementing advanced analytics can help identify growth opportunities and optimise pricing strategies. Automation can reduce costs and improve accuracy in back-office functions. Cloud migration can enhance scalability and reduce IT expenses.

Richard J. Keenlyside wants to be the go-to expert for global organisations needing strategic IT leadership and digital transformation. His approach highlights how integrating technology strategy with business goals is essential for creating value in today’s PE landscape.

Looking Ahead: What This Means for PE Firms and Portfolio Companies

As we move forward, the subtle shift in PE returns will continue to shape investment strategies and operational priorities. Firms that adapt by focusing on genuine business improvements rather than financial engineering will be better positioned to deliver strong returns.

Portfolio companies should embrace innovation, operational discipline, and strategic growth initiatives. PE teams must support these efforts with the right expertise, including strategic IT leadership, to navigate complex challenges and seize new opportunities.

This evolving landscape demands a clear understanding of where returns are coming from and a disciplined approach to value creation.

By recognising and adapting to these changes, you can ensure your investments and strategies remain robust and competitive in 2026 and beyond.