Private Equity: Continuous Improvement in a More Expensive World

Middle-market companies have rebounded in the near term with earnings growth, but as the cost of capital has increased, there is much that private equity backers can do to push profitable growth in their manufacturing businesses.

As uncertainty continues to cloud the U.S. macro picture, there was a rare piece of good news recently about the performance of the backbone of the economy – private middle-market companies. In the fourth quarter of 2022, companies in the Golub Altman Index (which includes between 110 and 150 companies in the Golub private lending portfolio) saw 9% earnings growth and 11% revenue growth over the same period in 20211.

In this article, Gary Hoover, VP of TBM’s Global Private Equity Practice, outlines the most important steps private equity firms can take to improve productivity and reduce working capital.

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Frequently Asked Questions

Why does the cost of capital change how private equity firms should think about value creation?

The article explains that a higher cost of capital raises the bar for acceptable returns and reduces tolerance for slow or speculative improvement plans. When capital is expensive, private equity firms can no longer rely on leverage, multiple expansion, or delayed growth to drive returns. Value creation must come from faster, more reliable operational improvement that generates EBITDA early and consistently throughout the hold period.

How does continuous improvement help offset the impact of higher capital costs?

Continuous improvement helps offset higher capital costs by unlocking productivity and margin gains without requiring additional investment. The article emphasizes that disciplined execution, waste elimination, and improved management systems increase output and profitability using existing assets. These improvements generate cash flow faster, reduce reliance on debt, and improve return on invested capital in a higher‑rate environment.

Why is execution discipline more important than ever when capital is constrained?

Execution discipline is more important because mistakes, delays, and variability are far more costly when capital is expensive. The article highlights that unmanaged daily losses—such as downtime, rework, and missed priorities—directly erode returns. Private equity firms that embed continuous improvement into daily management reduce execution risk, accelerate value creation, and protect returns despite tighter financial conditions.