The EBITDA Growth Paradox: When Operational Success Doesn’t Translate to Exit Value

Private equity funds typically rely on three main levers to generate value in portfolio companies: business growth, operational profitability and cash flow generation improvements, and effective financial leverage management. When well executed, these levers create measurable value.¹ However, a fourth lever is often underestimated: the valuation multiple. Although less tangible, the valuation multiple is crucial in the value creation equation. In many cases, a lack of focus on the multiple explains why deals with solid operational results fall short of their expected valuations.

PE-backed businesses report greater year-over-year revenue, employment, and EBITDA growth than middle market companies without any PE funding.² Further, PE-backed businesses report greater confidence in their capabilities, performance and resiliency compared to their non-PE-backed peers. It is possible that private equity-backed companies’ faster rates of growth and higher levels of profitability can be partially attributed to the capital, guidance and emphasis on governance that private equity operating partners bring to the relationship.

The Multiple Gap: Where Operational Gains Disappear

Average purchase price multiples rose to 7.5x trailing 12-month adjusted EBITDA in Q3 2025, up from 6.9x in Q2. Renewed activity in leveraged recapitalizations and growth financings supported this increase.³ These deals often involved larger, better-capitalized companies that can support higher leverage. Yet despite improved operational performance, many portfolio companies find their exit multiples compressed relative to entry.

FTI Consulting’s 2025 Private Equity Value Creation Index underscores this dynamic, with leaders highlighting the need to move beyond operational levers and focus more intentionally on factors that influence multiples and buyer perception.⁴ Successfully managing the valuation multiple requires a rigorous diagnostic to identify the factors weighing it down — factors that pure EBITDA growth cannot overcome.

Valuations have held steadily between 9.0x and 9.5x EV/EBITDA since 2023, a level only seen in 2009 and reflective of depressed acquisition appetite following a record year in 2021, exacerbated as the Fed tightened monetary policy.⁵ Multiples will likely revert toward the mean of 10.8x EV/EBITDA as buyers benefit from interest rate cuts and macroeconomic clarity, but the timing remains uncertain.

Size Premium and the Two-Tiered Market

Valuations continue to reflect the enduring size premium between very small and larger deal tiers. In H1 2025, transactions in the $1 million-$5 million and $5 million-$10 million tiers averaged 5.5x and 5.6x EBITDA respectively, while deals valued between $10 million and $25 million averaged 6.2x-6.7x.⁶ Buyout-only comparisons show a 0.9x spread between sub-$10 million deals and deals valued between $10 million and $25 million, consistent with the historical average.

Despite increased activity, the pricing gap between sub-$10 million and $10 million-$25 million transactions has held steady at historical levels rather than converging. This persistence reinforces a two-tiered market in which scale continues to command a premium. The most notable movement was in deals with EBITDA greater than $10 million, which rose from 7.7x to 8.1x, reinforcing the premium placed on larger, more resilient companies.⁷

The business services sector has solidified its role as a safe haven for private equity sponsors and lenders. With 57 reported deals through H1 2025, the sector represented nearly half of all small transactions. Multiples averaged 6.2x EBITDA, a 0.4x premium to the historical average of 5.8x, underscoring the resilience of asset-light, recurring-revenue models.⁸ In today’s higher cost of capital environment, these businesses remain the most financeable at the low end of the market.

The Add-On Premium Paradox

The difference between platform and add-on pricing in small deals is especially striking. In H1 2025, the smallest four of the five TEV ranges saw add-on transactions valued at a premium compared to similar-sized platform transactions.⁹ Overall, add-ons were valued at an EBITDA multiple 0.3x greater than platforms in H1 2025, but three of the four ranges with premium pricing for add-ons measured a difference of at least 1.2x.

This ongoing trend, first seen in 2023, underscores the structural reality of a troubled debt market: at the low end, add-ons are viable and financeable, while platforms are penalized with equity-heavy structures and weaker multiples. Financing dynamics further reinforce the add-on premium — in H1 2025, add-ons valued between $1 million and $5 million carried total debt coverage of 5.7x EBITDA versus just 2.3x for platforms.¹⁰

Beyond EBITDA: Building the Multiple

While improved margins and stronger cash generation are essential, they alone are insufficient to ensure long-term success. Building the valuation multiple involves stabilizing and diversifying revenue streams, optimizing cost structures, and strategically repositioning the company to align with future market dynamics.¹¹ Inorganic growth can be a catalyst — not only for expanding into new markets or acquiring new capabilities, but also for capturing higher multiples through arbitrage.

The second key dimension focuses on enhancing buyer confidence by elevating critical functions — finance, procurement, IT and commercial management — through professionalization. This enhancement process includes developing robust data management tools that offer clear visibility into business performance and dynamics. Additionally, maintaining balanced leverage aligned with industry benchmarks further strengthens financial resilience.

Morgan Stanley analysis determined that middle market managers grow revenue and EBITDA by nearly triple the amount of their larger cap peers from the time of purchase to exit.¹² As a result, middle market transactions have generated higher realized capital multiples (3.75x) than large cap buyout transactions (3.2x). Yet this operational outperformance doesn’t always translate into proportionally higher exit multiples — the gap represents the value left on the table when multiple management isn’t prioritized alongside operational improvement.

Leverage Constraints and Coverage Dynamics

Middle market first-lien debt averaged 4.5x leverage (debt to EBITDA) as of late 2024, compared to 5.8x in the broadly syndicated loan market.¹³ Given today’s still-elevated levels of nominal interest rates, debt capacity has been held in check by relatively thin coverage ratios. With interest rates on the downward trend, debt capacity levels are expected to inch upward in coming quarters.

Senior-debt and unitranche lenders are typically willing to extend only to around 5.0 to 6.5 times EBITDA — which means most borrowers are already tapped out, or would be if they financed an acquisition that way.¹⁴Even if lenders were more willing to provide capital, regulatory and rating agency constraints are likely to limit leverage to 6.0 or 7.0 times EBITDA. A fast-growing company is likely to have more pressing uses for its cash flow than servicing the high interest burden that this kind of leverage typically implies.

Ecosystem Implications

For Private Credit Lenders and Specialty Finance Providers: The EBITDA growth paradox creates opportunity for lenders who understand the full value creation picture. Portfolio companies with strong operational performance but compressed multiples may be candidates for refinancing or recapitalization that enables multiple-building strategies. Lower interest rates and accommodative lenders have positively impacted default rates —the Proskauer Private Credit Default Index for senior and unitranche loans was 1.84% in Q3 2025, consistent with prior quarters.¹⁵

For PE Sponsors: Extended hold periods—now averaging 6.7 years according to McKinsey, the longest since 2005 — make multiple management even more critical. Cost management and operational excellence are necessary but not sufficient for value creation during extended investment periods. Sponsors must invest in revenue diversification, buyer-confidence-building infrastructure and strategic repositioning to capture full value at exit. According to GF Data, buyers remain disciplined in a market still adjusting to higher financing costs and varied deal quality.¹⁶

For Investment Bankers: Understanding the multiple gap — and the factors that drive it — becomes essential to realistic valuation guidance. The flight to quality and scale themes that emerged in 2024 have remained pervasive, with average enterprise value paid by acquirers rising 4.1% YOY to $72.8 million.¹⁷ All buyer types have targeted larger transactions, reinforcing the size premium that sell-side advisors must account for when positioning assets.

For Legal Advisors: The multiple gap creates documentation complexity as sponsors pursue creative structures to bridge valuation expectations. Earnout provisions, rollover equity terms and seller financing become more prevalent when operational performance doesn’t translate to buyer price expectations. Legal advisors who understand the underlying valuation dynamics can structure deals that align incentives appropriately.

For Turnaround Advisors: Companies with strong EBITDA but compressed multiples often face strategic challenges that pure operational improvement cannot solve — customer concentration, revenue cyclicality or infrastructure gaps that concern prospective buyers. Turnaround advisors who can address these structural issues alongside operational performance provide differentiated value.

Looking Forward: Recalibrating Value Creation Levers

The exit backlog continues to grow. According to PwC, the private equity industry still held an estimated $1 trillion of unrealized assets halfway through 2025. Bain & Co.’s analysis highlighted that while current exit volumes were broadly in line with 2019 levels, buyout managers were holding twice as many assets in their portfolios now as then.¹⁸ With limited cash returns coming back to LPs, limited partners had limited wiggle room to make commitments to new funds.

For sponsors navigating this environment, the message is clear: EBITDA growth alone is not sufficient. The full value creation equation requires attention to the multiple — building the revenue diversification, operational infrastructure and buyer confidence that translate operational success into realized exit value. Those who treat multiple management as an afterthought will continue to see operational gains evaporate at exit.

Sources:

1. FTI Consulting, Beyond EBITDA: Rethinking Value in Private Equity, June 2025. https://www.fticonsulting.com/insights/articles/beyond-ebitda-rethinking-value-private-equity
2. Middle Market Center, Private Equity in the Middle Market 2025 Report. https://www.middlemarketcenter.org
3. GF Data, Q3 2025 M&A Reports, November 2025. https://gfdata.com/gf-data-report-2025-q3-middle-market-ma-slows/
4. FTI Consulting, Beyond EBITDA.
5. Capstone Partners, Capital Markets Update Q3 2025, December 2025. https://www.capstonepartners.com/insights/capital-markets-update/
6. Middle Market Growth, Small Deals Still a Big Factor H1 2025, November 2025. https://middlemarketgrowth.org/fall-2025-gf-data-small-deals-h1/
7. Forvis Mazars, Q2 2025 Middle-Market M&A Insights, September 2025. https://www.forvismazars.us/forsights/2025/09/q2-2025-middle-market-m-a-insights-signs-of-potential-recovery
8. Middle Market Growth, Small Deals Still a Big Factor H1 2025.
9. Ibid.
10. Ibid.
11. FTI Consulting, Beyond EBITDA.
12. CAIA, Returns In Focus – Value Creation Shines in the Lower Middle Market. https://caia.org/blog/2024/08/04/returns-focus-value-creation-shines-lower-middle-market
13. ABF Journal, Leverage Limits: Stress-Testing Middle Market Debt Capacity, June 2025. https://www.abfjournal.com/leverage-limits-stress-testing-middle-market-debt-capacity-in-a-volatile-2025-economy/
14. Neuberger Berman, Private Debt, Capital Solutions and the Early-Cycle/Later-Cycle Paradox. https://www.nb.com/en/global/insights/insights-private-debt-capital-solutions-and-the-early-cycle-later-cycle-paradox
15. Capstone Partners, Middle Market Leveraged Finance Report Q3 2025, December 2025. https://www.capstonepartners.com/insights/middle-market-leveraged-finance-report/
16. GF Data, Q3 2025 M&A Reports.
17. Capstone Partners, Capital Markets Update Q3 2025.
18. Alter Domus, 2025 Private Markets Year-End Review, January 2026. https://alterdomus.com/insight/2025-private-markets-year-end-review/