There is a persistent fiction in private equity that capital, properly allocated, creates value on its own. Write the cheque, install the board, hire a management team, and wait. This model has always been intellectually lazy. In today's market, it is also commercially dangerous.
The era of multiple expansion – buying at 6x, selling at 9x, and calling it skill – is over. Interest rates have repriced leverage. Multiples have compressed. The exits that once papered over mediocre operations no longer exist. What remains is the hard work of actually building better businesses, and that requires a kind of investor most funds are not structured to be.
Capital Is a Commodity
The supply of investable capital in European private equity has never been larger. Dry powder sits at record levels. Every credible mid-market company has access to multiple sources of financing – from traditional buyout funds to family offices to growth equity vehicles. In this environment, capital is not a differentiator. It is table stakes. The differentiator is what comes with the capital: the operational capability, the strategic clarity, and the willingness to do the work that transforms a company rather than merely owning it.
Yet the dominant model in private equity still separates the investment function from the operational function. Deal teams source, negotiate, and close. Operating partners – where they exist – are brought in after the fact, often as advisors rather than executives. The result is a structural gap between the thesis that justified the investment and the capabilities required to deliver it.
The Case for Operational Involvement
The most successful investments we have been involved in share a common characteristic: the investor was operationally present from day one. Not as a monitor. Not as a board observer reviewing quarterly packs. As a participant – someone with the mandate, the capability, and the incentive to drive change alongside management.
This is not about replacing management. It is about augmenting it. Most mid-market management teams are excellent at running the business they built. They are less experienced at the specific challenges that come with a PE ownership cycle – rapid professionalisation, margin expansion under time pressure, M&A integration, exit preparation. These are not failures of competence. They are gaps in exposure. Filling them requires investors who have done the work themselves, not investors who have read the case studies.
Sweat Equity as Alignment
The incentive structures in most PE deals are misaligned in ways that everyone acknowledges and nobody fixes. The fund earns carry on the portfolio. Management earns incentives on their company. The advisor earns fees regardless of outcome. Nobody's compensation is tied to the specific operational improvements that create the value.
Sweat equity – where the advisor or operating partner invests time, expertise, and personal capital alongside the financial investor – solves this problem. When we deploy into a portfolio company, we are not billing hours. We are building value that we participate in. Our returns are a function of the same P&L improvements we are driving. This is not altruism. It is the only incentive structure that produces honest advice.
An advisor who earns fees whether the company succeeds or fails will always hedge their recommendations. An operator who owns a share of the outcome will tell you the uncomfortable truth – that the commercial team is underperforming, that the acquisition target is overpriced, that the CEO needs to be replaced – because their own returns depend on getting it right.
What This Means in Practice
SENSUM operates at the intersection of advisory and investment precisely because we believe they cannot be separated without losing effectiveness. When we advise a PE fund on value creation, we are prepared to embed our people, invest our capital, and tie our compensation to results. When we invest directly, we bring operational capability that most financial investors cannot access.
The passive investor is a myth – not because passivity doesn't exist, but because it doesn't work. The businesses that compound value over a hold period are the ones where capital and capability arrive together, where the investor understands the operation deeply enough to add value and honestly enough to admit when they cannot. Everything else is just asset management with a premium fee structure.