Private equity firms claim they create value through "operational excellence." Better management. Strategic repositioning. Margin enhancement. Academic research says: 80% of PE returns come from leverage and multiple arbitrage. Only 20% from actual operations. Thread🧵 **
When you strip away the marketing, PE’s value creation formula is simple: 40% = financial engineering (leverage) 30% = multiple expansion (buying at 10x, selling at 14x) 10% = riding sector/market beta 20% = genuine operational improvements **
That 20% "operational improvement"? It’s usually low-hanging fruit that competent public company management could have implemented anyway: Cost cutting Supplier consolidation Basic ERP systems Not exactly rocket science. **
A 2023 study analyzed 8,000 buyouts over 3…
Private equity firms claim they create value through "operational excellence." Better management. Strategic repositioning. Margin enhancement. Academic research says: 80% of PE returns come from leverage and multiple arbitrage. Only 20% from actual operations. Thread🧵 **
When you strip away the marketing, PE’s value creation formula is simple: 40% = financial engineering (leverage) 30% = multiple expansion (buying at 10x, selling at 14x) 10% = riding sector/market beta 20% = genuine operational improvements **
That 20% "operational improvement"? It’s usually low-hanging fruit that competent public company management could have implemented anyway: Cost cutting Supplier consolidation Basic ERP systems Not exactly rocket science. **
A 2023 study analyzed 8,000 buyouts over 36 years. Conclusion: The vast majority of value creation is financial engineering, not operational genius. When PE does outperform, it’s because they bought small, unleveraged companies and added debt. **
The uncomfortable truth about PE "operational improvements" + what happens after PE firms exit in my newsletter: [] The data will make you rethink every PE pitch deck you’ve ever seen.open.substack.com/pub/hacheimsch… **
Here’s the dirty secret: Many PE "operational improvements" come at the expense of long-term sustainability. PE-owned companies systematically underinvest in: R&D Maintenance capex Employee development They optimize for EBITDA to maximize exit multiples. **
What happens after PE exits? A 2022 study tracked companies 5 years post-exit: 60% underperformed industry benchmarks in revenue growth 45% had declining margins The value extraction was front-loaded. The deterioration came after the PE firm sold out. **
Think about the incentive structure: PE firms hold companies 4-6 years on average. Why invest in initiatives with 7-10 year payoffs? Why maintain equipment that won’t break down until after you’ve exited? Short-term optimization ≠ long-term value creation. **
The best evidence PE isn’t creating operational value? Look at what they pay portfolio company CEOs. If PE firms were truly adding value through board expertise and strategic guidance, why do they need to pay CEOs 2-3x public company comp to hit targets? **
PE’s operational value creation story is marketing genius. It lets them charge 2-and-20 for what’s essentially a levered small-cap value strategy. Next time a GP pitches "operational excellence," ask them to quantify it vs. leverage and multiple expansion. Watch them squirm. **
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More from @HacGlobalMedia
Jan 27
Private equity firms are sitting on $2.8 TRILLION in uninvested capital. That’s double the 2015 level. Everyone thinks this is a sign of strength. It’s actually a ticking time bomb. Here’s why 🧵
Dry powder = committed capital that hasn’t been deployed yet. PE firms are in a trap: Can’t invest at good prices (everything still priced for zero rates) Can’t return capital to LPs (would admit they can’t find deals) So they sit... and charge 2% management fees.
In 2023 alone, PE firms raised $600 billion globally. Despite having nearly $3 trillion already sitting idle. Despite exit markets being frozen. Despite 2020-2021 vintage funds tracking toward terrible returns. The money machine keeps running.
Read 11 tweets
Jan 26
You commit $100M to a private equity fund. It doubles your money in 10 years. Sounds great, right? After fees, you earned less than SPY. Let me show you the math that LP consultants apparently can’t do 🧵
Typical PE fees: 2% annual management fee 20% carried interest (on profits above 8% hurdle) On a $100M commitment over 10 years, you’ll pay $15-20M in management fees BEFORE any performance fees. Already down to $85M working for you.
Typical PE fees: 2% annual management fee 20% carried interest (on profits above 8% hurdle) On a $100M commitment over 10 years, you’ll pay $15-20M in management fees BEFORE any performance fees. Already down to $85M working for you.
Read 11 tweets
Jan 25
In 2022, private equity firms reported their portfolios were down just 4%. The S&P 500 was down 24%. Either PE firms discovered recession-proof companies, or they’re lying about valuations. Spoiler: They’re lying. Here’s the scam🧵
When public markets crashed in 2022, pension funds faced a crisis called the "denominator effect." Their PE holdings (marked at fantasy prices) suddenly represented 35%+ of portfolios instead of 25%. They were forced to halt NEW investments to rebalance.
Why didn’t PE firms mark down their portfolios like public markets? Simple: Management fees are calculated on NAV. Carried interest depends on reported returns. And they need to keep fundraising. Markdowns = lower fees + angry LPs + failed fundraising.
Read 11 tweets
Jan 23
We’re 24 days into 2026. Let me show you what’s happened—and why this month will define the entire year... 🧵
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Jan 23
Next Tuesday-Wednesday: Fed meeting. Expected rate decision: NO CHANGE (3.50-3.75% holds). Markets pricing: 0% chance of cut. So why does it matter? Because Powell’s COMMENTARY could move markets more than Intel earnings did. Here’s why... 🧵
What Powell will address: 1. The DOJ Criminal Investigation Will he mention it? Defend himself? Stay silent? His response (or non-response) matters for Fed credibility. Silence = letting accusations stand Defense = appearing political Either way = awkward
The SCOTUS Case (Trump v. Cook) Oral arguments suggested Fed independence will be preserved. But ruling hasn’t come yet. If Powell comments: "We’re confident in our independence" = Reassuring "We’re monitoring the situation" = Concerning
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Jan 23
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Normally, gold and stocks move INVERSELY: Stocks UP → Risk on → Gold down Stocks DOWN → Risk off → Gold up But right now: Stocks: Flat to slightly up Gold: MOONING This is rare. And important.
What it signals: Investors are saying: "I want to own equities (growth potential) BUT I also need insurance (gold) because I don’t trust the system." Translation: Hedged optimism or nervous bull market
Read 14 tweets