Private equity has rarely faced such a contradiction: record levels of dry powder, but dealmakers remain hesitant. Valuations are under pressure, sellers are holding out for yesterday’s multiples, and exit routes are constrained. Yet carve-outs are gaining momentum. They thrive in precisely this type of volatility, creating opportunities where uncertainty should, in theory, stall activity.
By separating non-core businesses and structuring them for independence, carve-outs give sponsors a way to deploy capital, manage risk, and unlock value. But they also demand precise execution. In 2025, it’s not the presence of capital that distinguishes market winners; it’s the discipline of separation and transition.
National Trends
Carve-outs are taking a growing share of buyout activity. In H1 2025, they accounted for 10.6% of U.S. buyouts, above the five-year average of ~8.7% (CBH Insights). Deal value is rising too: 83 carve-outs totaled US$20.56 billion in the U.S. & Canada (S&P Global).
Yet returns are moderating. Bain reports average carve-outs now deliver roughly 1.5× MOIC, modestly below the average for all buyouts, while top-quartile carve-outs approach 2.5× MOIC (Bain Global Private Equity Report 2025). Meanwhile, PE firms hold ~US$2.51 trillion in dry powder in North America (S&P Global), highlighting the urgency to put capital to work.
Why Carve-Outs Are Gaining Momentum
- Exit Market Headwinds
IPO volatility and selective M&A markets make full exits harder. Carve-outs provide a “half-exit,” offering liquidity without losing all upside (Grant Thornton). - Corporate Divestiture Pressure
Companies are shedding non-core units to refocus on growth or reduce debt. Tariffs and supply-chain disruptions make non-core assets less attractive to hold (S&P Global). - Capital Deployment Needs
With record dry powder, sponsors are increasingly open to complex deals if the value-creation upside is clear. - Valuation Pressure
Competition and high entry multiples make execution quality critical. Operational separation and efficiency gains often determine whether returns hit the target (Bain).
Execution Challenges
Carve-outs are inherently complex. Missteps in execution can erase expected value.
| Challenge | Implications |
| Day 1 readiness | Standalone operations must function immediately post-divestiture. Delays in finance, IT, or operations disrupt business continuity. |
| Stranded costs & shared services | Failure to separate shared IT, HR, or infrastructure costs inflates overhead. |
| Financial reporting | Regulatory and audit gaps can delay close or hurt valuation. |
| Transition Service Agreements (TSAs) | Poorly structured TSAs extend dependency on the seller, increase costs, and stall transformation. |
| Leadership & culture | Gaps in management alignment can slow growth and erode morale. |
E78’s Carve-Out Approach
We view carve-outs through the buyer’s lens, ensuring the separation plan is practical, achievable, and aligned to deal value drivers. Our approach emphasizes:
- Feasibility review of the carve-out plan to safeguard business continuity and investment value.
- Conditions of sale analysis to ensure purchase agreement terms align with carve-out realities.
- Transition Service Agreement structuring: defining services, service levels, costs, and exit timelines to avoid overreliance on the seller.
- Risk management: proactively identifying “points of failure” in people, processes, and systems.
- Program management discipline: using proven methodologies to guide sponsors from pre-deal through TSA exit.
Our prioritization focuses on Day 1 readiness while ensuring business as usual is not disrupted. The goal is to strike the appropriate balance between speed of execution and stability to ensure operations move forward seamlessly.
Transition Service Agreements: The Critical Lever
TSAs often make or break carve-out success. While they are meant to bridge the gap post-close, poorly structured agreements can trap buyers in extended, costly service arrangements. Common pitfalls include underestimated service costs, unclear service levels, and unrealistic exit timelines tied to IT separation.
Best practices include:
- Building detailed TSA definitions and cost validations early in the process.
- Prioritizing IT disentanglement, since systems often dictate TSA length.
- Establishing clear milestones for TSA exit to accelerate independence.
E78’s experience shows that careful TSA structuring not only protects value but also accelerates the carved-out entity’s ability to operate independently and pursue growth.
Implications for PE Sponsors
- Assess separability early: Include TSA scope and exit timing in due diligence.
- Set realistic expectations: Margin expansion is harder in today’s environment; model conservatively.
- Invest in execution: Strong carve-out management, either in-house or through specialized advisors, is essential.
- Balance speed and quality: Day 1 readiness is critical, but cutting corners risks long-term value.
From Defensive Maneuver to Growth Catalyst
Carve-outs in 2025 are no longer just defensive transactions for sellers — they are a deliberate strategy for sponsors seeking to put capital to work in a constrained environment. But success requires a mindset shift: stop viewing carve-outs as administrative headaches and start treating them as precision tools for growth.
The path forward for sponsors starts with three priorities:
- Challenge separability early. Build TSA terms, cost validation, and IT disentanglement into diligence.
- Model conservatively. Assume margin expansion takes longer, and stress-test value creation assumptions.
- Invest in execution muscle. Build or access teams with proven carve-out expertise across finance, technology, and program management.
In volatile markets, carve-outs prove a simple truth: value isn’t created by conditions — it’s created by execution.