In the period between 2009 and 2022, private equity managers thrived amid an environment of low interest rates and rising asset prices, which led to financial engineering serving as a primary driver of portfolio value. In recent years, however, higher interest rates, elevated valuations, and tighter exit conditions have reduced the effectiveness of this value creation method. As a result, financial engineering has shifted from a core value driver to a supporting tool, prompting firms to increasingly focus on operational improvements within portfolio companies. Indeed, top-line growth and margin expansion are the key areas of value creation today, with revenue growth accounting for roughly 54% of value creation for deals that saw exits between 2017 and 2024. This dynamic can be attributed to the role of revenue growth as a sustainable and longer-term source of value creation, as it supports revenue base expansion, enables EBITDA growth, and facilitates more favorable valuation outcomes.

To drive both growth and profitability, private equity firms deploy a range of operational initiatives, including cost transformation, pricing optimization, technology integration, and supply chain improvements. While studies show that operations and pricing are the most effective levers in value creation playbooks, it is important to remember that execution is just as important as planning. To that point, a recent study found that more than half of executives cited poor implementation as a primary and controllable cause of underperformance of their businesses. Ultimately, as operational improvements become more crucial to value creation, private equity firms that can execute with discipline, particularly across revenue growth and margin expansion, will differentiate themselves when it comes to delivering returns and building more resilient and scalable businesses.

Most have traditionally viewed a successful exit for a venture-backed start-up as either an IPO or an acquisition by a larger strategic or public company. That long-standing dynamic is gradually shifting, as start-ups are now more active than ever as acquirers. Indeed, what was once a buyer landscape dominated by strategics and public corporations now increasingly includes venture-backed firms. According to PitchBook-NVCA data, VC-backed buyers accounted for more than 38% of total U.S. venture M&A activity last year, up from roughly 20% a decade ago, with 2025 marking seven consecutive years of increasing participation. Specifically, more than 387 start-ups were acquired by venture-backed companies last year, compared with 177 in 2015. Although overall exit volumes remain below 2021 peak levels, the steady rise in startup-led acquisitions reflects a structural shift toward internal consolidation within the venture ecosystem.

The drivers behind this shift are largely pragmatic, as capital remains available but far more selective. Growth equity investors are increasingly concentrated within perceived category leaders, while companies that fall slightly below that threshold face a more challenging fundraising environment. For scaling start-ups that have survived earlier rounds of capital selection, acquisitions can serve as an efficient strategic accelerant. Rather than depleting cash reserves to build adjacent features, expand geographically, or acquire customers organically, management teams can accelerate these objectives through M&A, adding revenue, product capabilities, or talent in a single transaction. At the same time, the bar for IPO readiness has risen materially in the last five years, as public investors are increasingly prioritizing profitability, operating leverage, and durable revenue growth. For venture-backed companies aiming to meet these standards, combining with a competitor or complementary platform can create scale and margin expansion more quickly than standalone execution. In some cases, consolidation represents the most rational path forward in a more disciplined capital cycle. This trend is visible at the upper end of the market as well. For instance, OpenAI completed five acquisitions across hardware design, experimentation tooling, fintech AI capabilities, and model infrastructure in 2025 alone. The fact that one of the world’s most valuable private companies is actively using M&A as a growth lever reinforces the idea that an acquisition is no longer solely a means of exit but increasingly a tool for expansion.

While it remains too early to declare a permanent transformation in venture markets, it is clear start-up-led consolidation is becoming more common and strategically meaningful. As companies remain private for longer and develop greater operational scale, their roles as acquirers may continue to expand.

Private equity is known for being an illiquid asset class, with investments typically locked up for several years and limited options to access cash before a fund winds down. Investors have largely accepted these restrictions in exchange for the potential of higher returns, but this lack of liquidity has become a challenge more recently. For instance, DPI (distributions to paid-in capital) as a percentage of net asset value for 2024 was 12%, significantly lower than the 25-year average of 21%. As a result of these dynamics, there has been rapid growth in the private equity secondary market, which allows investors to sell their existing stakes in ongoing private equity funds. Indeed, what was once a niche option for distressed sellers is now a mainstream tool for managing portfolios, with global secondary market transactions on pace to exceed $200 billion in 2025. This figure would constitute a record high. Interestingly, more than 50% of secondary transactions in the first half of this year came in the form of Limited Partner (“LP”)-led secondaries, which occur when existing LPs sell fund interests to other investors.

The rise of LP-led secondaries is about more than investors simply “cashing out.” Specifically, LPs may tap the secondary market to rebalance portfolios when private equity exposure becomes too high, move away from underperforming funds, or free up capital to invest in new opportunities. Institutions of all types are embracing this strategy. For instance, the University of Illinois Foundation recently announced the sale of roughly $245 million of net asset value of private market assets, aiming to reduce exposure to high-risk, illiquid positions and reposition its endowment for greater long-term stability. Additionally, CalPERS announced a potential $3 billion secondary transaction earlier this year, and Yale University is currently in talks for its first-ever secondaries sale to convert older private equity holdings into liquid assets for reinvestment. These developments reflect a broader trend among institutional investors seeking flexibility and liquidity amid a challenging private equity environment. Indeed, as private equity funds continue to hold assets for longer and exit activity remains slow, the secondary market may become a standard part of portfolio management for both large institutions and smaller investors in the years ahead.