Through IEQ Elevate, our professional development platform, we regularly engage with leading investment managers to deepen our understanding of evolving market dynamics.
Jonathan Sokoloff, Managing Partner of Leonard Green & Partners, recently joined us to share perspectives on private equity positioning in a structurally higher interest rate environment. Sokoloff believes that in today’s market environment, earnings growth and operational value creation may matter more than financial engineering.2
A Shift in the Private Equity Playbook
Over the past decade, declining interest rates and multiple expansion supported many private equity outcomes.2 In contrast, Sokoloff noted the current environment presents different constraints. Debt costs are higher, capital markets are more selective, and valuation expansion appears less predictable than in prior cycles.3
Industry data suggests that during periods of higher financing costs, return composition tends to shift toward revenue growth and margin expansion rather than multiple arbitrage.1 During the session, Sokoloff discussed how underwriting frameworks are adapting accordingly, with renewed emphasis on organic EBITDA growth, operational execution, and downside protection.
This shift places greater importance on:
- Sector specialization and domain expertise
- Operational engagement at the portfolio company level
- Capital structure discipline
The Role of Operational Value Creation
Recent research indicates that operational improvements and revenue growth have represented a significant share of long-term private equity value creation, particularly in more constrained market environments.1,4
Sokoloff shared that in a higher-rate environment, where leverage is more expensive and refinancing risk increases, managers may need to rely more heavily on operational initiatives to drive outcomes.3
Operational initiatives cited in the session included:
- Revenue acceleration through pricing strategy and customer expansion
- Cost structure optimization
- Digital capability enhancements
- Strategic add-on acquisitions
In an environment where exit timing is less predictable and capital costs are elevated, operational resilience may serve as a differentiating factor across managers.
GP-Led Secondaries as a Structural Evolution
Market data indicates that GP-led transactions have become an increasingly meaningful portion of total secondary market volume in recent years.⁵ While these structures can provide exposure to seasoned assets with greater visibility relative to blind-pool commitments, Sokoloff emphasized that risks remain, including valuation sensitivity, sponsor alignment considerations, and liquidity constraints typical of private markets.
IEQ Capital’s Perspective
At IEQ, we believe private equity remains a relevant allocation within diversified private market portfolios for qualified investors. However, the drivers of value creation may differ from those observed during the prior decade of declining rates and abundant liquidity.
We believe emphasis on operational capability, disciplined capital structures, and thoughtful underwriting is increasingly important in a structurally higher-rate regime. Selectivity across managers, strategies, and structures remains critical.
Sources
- Bain & Company. (2024). Global private equity report 2024. Bain & Company.
- (2022). 2022 annual U.S. private equity breakdown. PitchBook Data, Inc.
- McKinsey & Company. (2024). Private markets turn a corner: Navigating a higher-for-longer environment. McKinsey & Company.
- McKinsey & Company. (2023). Private equity value creation: A shifting playbook. McKinsey & Company.
- (2024). Global private equity secondary market report. Preqin Ltd.
IEQ Capital, LLC has a business relationship with Leonard Green. This relationship creates a conflict of interest for IEQ. To mitigate such conflicts of interest, all alternative private investment funds must satisfy the due diligence guidelines and requirements as established by IEQ in order to be approved for client investment.
This material is as of the date indicated, not complete, and subject to change. Additional information is available upon request. No representation is made with respect to the accuracy, completeness, or timeliness of information, and IEQ assumes no obligation to update or revise such information. The information set forth herein has been developed internally and/or obtained or derived from sources believed by IEQ Capital, LLC (“IEQ Capital”) to be reliable. However, IEQ Capital does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does IEQ Capital recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. It is not intended to be, nor should it be construed or used as investment, tax, accounting, legal or financial advice. IEQ provides no assurance or guarantee that any investment will be successful or that any returns will be achieved. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Equities
- Interest Rate Risk: Higher interest rates may adversely impact equity valuations.
- Macro Risk: Macro factors including interest rates, inflation, or economic growth may lead to materially different return outcomes for the sector, particularly if there is a material impact to earnings outlooks.
- Mark to Market Risk: Equities are relatively volatile securities and may be especially volatile in a poor macro backdrop.