European private equity firms place greater emphasis on value creation to improve returns
As geopolitical conflict, high valuations and slow exits disrupt traditional business, European private equity firms are changing their focus on how they generate returns. AI is also growing in popularity in private equity, with nearly two-thirds of funds using AI tools to support value creation.
According to a new report from global consultancy Alvarez & Marsal, geopolitical instability has become the primary challenge for the industry, affecting value creation for 62% of firms. Tariff volatility and inflation follow closely, with each cited by 58% of respondents.
Last year, European private equity investment continued its strong recovery from a multi-year slowdown that began during the pandemic. Deal value surged as improving macroeconomic conditions in the second half of the year gave investors, under mounting pressure to deploy capital, the confidence to move ahead with transactions, particularly large ones.
But in today’s difficult market environment marked by geopolitical pressures, high inflation and broader macroeconomic uncertainty, profit growth is increasingly coming from internal business improvements rather than simply expanding revenues.
The study reveals that margin expansion accounted for 51% of profit growth for European businesses exited in 2025, which is up significantly from just 22% for those exited before 2023. Conversely, the impact of revenue expansion fell from 79% to 49% during that exact time frame.
To achieve these goals, 58% of private equity firms are now sending operational teams into new investments within the first 100 days, up from 29% last year. “Private equity value creation has entered a new phase,” said Steffen Kroner, managing director at Alvarez & Marsal.
“The firms that outperform in this cycle will be those that build stronger businesses through operational discipline, sharper commercial execution and better use of data. Higher valuations, longer hold periods and geopolitical shocks have raised the bar for every value creation plan. Sponsors need to identify the operational levers before close and start executing from day one.”
Secondary markets offer alternative liquidity
Because traditional channels of growth have slowed down, investment managers are turning to secondary markets and continuation vehicles to return money to their investors. The use of these secondary funds has nearly doubled over the past year, rising from 24% to 43%. At the same time, the number of firms willing to accept a forced sale at a discounted valuation has dropped sharply from 29% to just 7%.
The vast majority of the businesses being moved into these continuation funds are healthy organizations. Specifically, 45% of respondents noted that these businesses are performing as expected but simply require extra time to achieve their financial potential.
Another 42% described the investments as high-quality assets being held back by poor market timing. Agreeing on the right price remains the hardest part of these deals, with 64% of respondents calling investor alignment on valuation their primary obstacle.
Growing importance of AI
The Alvarez & Marsal report also shows that new technologies like AI are emerging from experimental phases into standard business tool. Nearly two-thirds of private equity funds (63%) now use AI within their corporate improvement programs, compared to 41% last year. This application has matured considerably, with 39% of organizations successfully scaling the technology across multiple corporate functions.
The most common application for the technology is data analysis and generating business insights, cited by 69% of respondents. General operational efficiency was cited by 60%, while finance department optimization was the main use case for 55% of firms.
Businesses are also beginning to see real financial benefits from using advanced computing tools for dynamic pricing models, demand forecasting, and automated purchasing. However, major hurdles remain, as 60% of executives cite high implementation costs and unclear returns as their main concern, while 45% complain about poor data quality.
“AI is becoming an important part of the operational value creation toolkit, but it has to be tied to clear earnings and cash levers,” said Bob Rajan, managing director at Alvarez & Marsal. “The most effective use cases are focused on pricing, procurement, forecasting and finance automation, where better data can translate directly into margin improvement and faster decision-making.”
