To succeed today, a private equity firm needs to bring much more to the table than financial creativity. According to a 2007 study by Ernst & Young, two-thirds of the earnings growth (before taxes, interest and capital expense) at private equity-owned portfolio companies came from business expansion, with organic revenue growth being the most significant element. Cost reductions accounted for only 23 percent of pre-tax earnings growth in U.S. companies. In other words, private equity investors add to the company’s strength by implementing significant operational improvements to the business. See Private equity partnerships improve the performance of their portfolio companies

Another study done for the European Parliament supports this view. The study found that private equity-acquired companies outperformed comparable publicly-traded companies in terms of sales (14 percent), earnings before taxes, interest and capital expense (five percent), and profitability (five percent) growth. See Private equity partnerships improve the performance of their portfolio companies

The private equity firm therefore adds new capabilities to the company it develops, grow revenues and markets, and the best private equity managers therefore have deep expertise in the sector in which the investment is being made; and implements a performance based culture and incentives to assure entrepreneurialism and results in addition to adding managerial and functional capabilities.