In today’s market, private equity firms recognize that acquisition alone no longer drives sufficient growth. As interest rates rise, deal pipelines tighten, and LPs apply more pressure, firms shift their focus from revenue expansion to margin improvement as the core value driver. In 2025, top-performing firms go beyond sourcing deals. They optimize them. They reduce SG&A waste, capture operational efficiencies, and grow EBITDA through disciplined cost management and integrated platform operations. We work closely with sponsors and portfolio companies to execute margin expansion strategies that directly enhance enterprise value.
What Is Margin Expansion?
Private equity firms treat margin expansion as a strategic lever for value creation, not just an operational goal. While revenue growth still plays a role, many sponsors now recognize that increasing profitability through operating margin expansion delivers faster and more controllable returns. Margin expansion in private equity means improving EBITDA margins by increasing efficiency, eliminating waste, and building operating models that support scale.
Firms achieve this by transforming cost structures, integrating functions, and improving key processes. They centralize finance and HR, modernize IT systems, renegotiate vendor agreements, and apply zero-based budgeting to evaluate spend from the ground up. These steps reduce the cost base while protecting or enhancing performance.
In today’s competitive and high-cost market, sponsors rely on margin expansion to drive higher valuations and prepare portfolio companies for exit. Firms that prioritize this from the outset build more resilient, scalable operations. Our team works with sponsors and operators to identify margin opportunities at every phase of the deal lifecycle. From diligence and Day One planning through ongoing value creation and exit preparation, we deliver both strategic guidance and execution support to help portfolio companies grow profitably.
What Is the Margin Expansion in PE?
In private equity, margin expansion is not just an operational goal. It’s a strategic lever for value creation. While revenue growth remains important, many sponsors are realizing that improving profitability metrics often delivers faster and more controllable returns. Margin expansion in PE refers to systematically increasing EBITDA margins by enhancing efficiency, reducing waste, and building more scalable operating models within portfolio companies.
This often involves a combination of cost transformation, functional integration, and process improvement. PE firms may centralize finance and HR functions, optimize IT infrastructure, consolidate vendor contracts, or implement zero-based budgeting across departments. These initiatives are designed to compress the cost base while maintaining or improving output.
For firms operating in today’s high-cost, competitive environment, margin expansion is becoming a more reliable path to multiple expansion and exit readiness. At E78, we help sponsors and operators identify margin opportunities across the deal lifecycle, from diligence and Day One planning to ongoing value creation and divestiture preparation. Our approach blends advisory expertise with execution support, giving portfolio companies the tools they need to scale profitably.
Margin Expansion in 2025: A Strategic Growth Lever for Private Equity Firms
As market conditions shift, private equity firms revise their playbooks. In 2025, rising capital costs, tighter lending standards, and longer exit timelines will reduce the reliability of traditional growth strategies like aggressive top-line expansion through M&A integrations. In response, many sponsors focus inward and lead with margin expansion as their core value creation strategy. They seek to grow EBITDA by improving efficiency, reducing costs, and optimizing operations, rather than relying solely on external revenue growth.
Instead of chasing scale through acquisition, sponsors build operational scale from within. They optimize shared services, launch digital transformation efforts across portfolio companies, and enhance unit economics through data-driven pricing and supply chain adjustments. These actions not only improve near-term profitability but also increase asset appeal during the exit process.
Investors increasingly expect sponsors to show how they create value, not just how much. Limited partners apply greater scrutiny to cost discipline, execution quality, and portfolio-level performance. Sponsors who demonstrate margin-focused leadership and deliver measurable outcomes stand out in today’s competitive fundraising environment.
Firms that pursue margin expansion from Day One take intentional, structured steps to build value. Key initiatives include:
- Technology Expense Management: Sponsors identify and reduce unnecessary spend across legacy platforms, overlapping software, and unmanaged IT contracts. They rationalize vendors, optimize licenses, and reinvest savings in core initiatives that accelerate integration or scale.
- Centralization of Finance and Back-Office Functions: Sponsors build shared services across finance, HR, and IT. This eliminates redundancy, standardizes workflows, improves reporting accuracy, and shortens close cycles, ensuring better alignment between operational output and financial performance.
- Process Optimization and Automation: Sponsors analyze high-effort workflows and automate where possible. They streamline functions like accounts payable and inventory tracking while maintaining control and compliance. These changes increase efficiency without reducing quality.
- Functional Integration Across Add-Ons: In buy-and-build scenarios, sponsors consolidate systems, leadership structures, and reporting frameworks. They align ERP platforms, standardize KPIs, and unify processes across acquired businesses to drive synergy and operational leverage.
- Pricing and Profitability Analysis: Sponsors analyze pricing strategies, evaluate customer-level profitability, and assess SKU-level margins. They identify where to lift prices or streamline offerings to improve gross margin while preserving customer relationships.
- Retention and Workforce Optimization: Sponsors map critical roles, benchmark compensation, and structure incentives to retain top talent. They redesign organizational charts to support lean operations and guide teams through change with tailored communication and support strategies.
When firms launch these initiatives early, they embed margin expansion into the core of their value creation model. They build defensible, scalable improvements that perform in all market environments.
Private equity firms that prioritize execution, not just strategy, see stronger outcomes. Margin expansion creates the path to those results.
Drive Margin Expansion Across Your Portfolio
Private equity firms now define success in 2025 by how effectively they focus on driving margin expansion. Leading firms take disciplined action, prioritize operational efficiency, and build margin improvement into every integration plan. These strategies position them to deliver consistent returns, even in volatile markets.
Want to uncover margin opportunities and translate them into measurable results? Reach out to our team to explore strategies that create lasting value across your portfolio.
