In theory, value creation in private equity follows a script. And a long-term-strategy. But what happens when economic policy irrationality upsets the financial markets? The end of zero interest rates and rising multiples is presenting private equity managers with challenges they’ve never faced before. The truth is, crises have always been the norm. The A&M guide to successful investments in a VUCA world shows how to navigate them.

When Donald Trump introduced his so-called reciprocal tariffs in April—affecting nearly all U.S. imports—the financial world was instantly transformed. It suffered a historic market slump: within a few hours, the Dow Jones Industrial fell by almost 1,300 points, the S&P 500 fell by 3.3 percent and the Nasdaq by as much as 4.8 percent [1]. According to a calculation by Bloomberg, a total of around 10 trillion dollars in market value was wiped out worldwide within three trading days [2] – equivalent to almost 10 percent of global gross domestic product [3].

Tariffs are the sharpest pain point for investors in the private equity space. Our Value Creation Report, at Alvarez & Marsal confirms this. These events dramatically demonstrate a profound truth that the financial markets are reluctant to confront: The era of "calculable" stability is over. For private equity investors, who plan and think in cycles of four to eight years, it has become clear once and for all that uncertainty and volatility are no longer mere side effects, but a structural feature of the markets.

Stability - a golden anomaly 

In the past decade, an "El Dorado" for corporate financing seemed to have become a reality. Money was cheap, growth was omnipresent and the belief in progress - both technological and social - was almost religious. Private equity benefited disproportionately: from 2010 to 2020, the global deal volume rose from around 150 billion to over 800 billion US dollars [4]. The capital available but not yet invested ("dry powder") reached a record value of USD 2.62 trillion in 2023 [5]. And because debt capital was almost free, leverage became a growth strategy. 

In the process, we lost sight of the fact that stability is not the normal state of capitalist systems, but rather a rare phase - usually bought with political compliance and constant monetary policy fire, characterized by central banks that willingly provided liquidity and political consensus on open markets. With today’s economic and geopolitical dynamics, even private equity has landed squarely in the reality of a VUCA world: marked by volatility, uncertainty, complexity, and ambiguity. The global economy is not in a temporary crisis—it’s returning to normal. And that normal is unstable. Crises have always existed. They’re part of life.

From financial engineering to operational reality 

The traditional private equity formula - buy companies, leverage them with cheap debt capital, let the existing management act and then sell with a significantly higher equity value - reached its limits. Historically favorable credit conditions and constantly rising multiples made this model attractive for a long time. However, the cost of debt capital in the USA has now risen from 0.25 percent to 5.5 percent. The highest level in 22 years [6].

In addition, company valuations tend to fall on average: Except for a high last year, the average EBITDA multiple for leveraged buyouts fell from 13.95 in 2022 to currently 12.42 [7]. For private equity, this means that pure financial engineering is no longer sufficient as a strategy to achieve appropriate returns. Instead, in-depth operational commitment and sound industry expertise are once again required. In addition to other focus topics, needs answers to the following questions: How crisis-proof is the business model really? How independent is it from political, regulatory or ecological shocks? 

The new compass: resilience and operational commitment 

This paradigm shift has resulted in a customized strategy for private equity investors that can ultimately be read like a playbook.

• Management quality as a success factor
  Investors must select their management teams more carefully than ever before and check whether the right people are in the right positions. The decisive criteria are now operational experience, crisis expertise and the ability to adapt quickly. 
• Scenarios instead of forecasts 
  A detailed scenario analysis is essential to be able to react flexibly to geopolitical tensions, regulatory changes or economic downturns. 
• More cautious capital structuring 
  The time of maximum leverage financing is over. More realistic, robust financing structures with a sufficient equity buffer are in demand. 
• Operational value creation 
  Creating operational value - through restructuring, optimizing supply chains or improving efficiency - is becoming an even more central element of successful private equity strategies. 
• Adjusted return expectations 
  The high return expectations of the past are giving way to a sober realism: 12 to 15 percent annual returns are increasingly seen as attractive compared to earlier, often but also unachieved targets of over 20 percent.

Strategic partners instead of mere investors 

The strategy of private equity must therefore adapt: Value is no longer created through balance sheet cosmetics, but through substance. Funds that have internalized operational excellence or can fall back on it have an advantage. It's all about restructuring expertise, supply chain know-how, digitalization and ESG capability. The traditional role of the silent investor is changing into an active co-creator. According to Preqin, 70 percent of institutional investors expect operational value creation plans even before the deal is closed. In this new context, specialized consulting firms such as Alvarez & Marsal, which not only provide advice but also implement it in practice, are becoming increasingly important. This makes private equity more operational, more substantial and ultimately more successful. 

The renaissance of experience and realism 

In today’s reality, crisis experience matters. Many younger investment professionals have spent their entire careers in a zero-interest environment. For them, the current climate is a whole new world. Experienced managers—those who’ve weathered financial crises, currency shocks, and political cycles—are becoming a critical resource. Not as traditionalists, but as realists. Pragmatists in the storm. 

Substance beats storytelling