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What private equity owners actually need from a portfolio-company board

The arithmetic of a buyout has changed. A board built for a four-year hold and a multiple-driven exit is now being asked to deliver operating growth over seven years, settle the CEO question before year two settles it for them, and keep a leveraged company on the right side of creditor-duty law in more than one jurisdiction. Here is what the owner needs from the board — and where the sponsor's own reflexes get in the way.

A portfolio-company board is not a public-company board with fewer people. It is the instrument through which the owner executes an investment case, and it is judged by one number: distributions returned to the fund's investors, on time. That has always been true. What has changed since roughly 2022 is that the investment case behind most portfolio companies has quietly expired, the hold has lengthened, and the exit that was supposed to validate the plan has not arrived. The board's job has changed with it, and many boards have not noticed.

The owner's maths has changed

The numbers describe an industry that is long on assets and short on realisations. Bain & Company's 2026 Global Private Equity Report counts roughly 32,000 unsold buyout-backed companies worth $3.8 trillion, and records that distributions to limited partners as a share of net asset value have "been mired below 15% for four consecutive years". Holding periods at exit for buyout funds "now hover at around seven years – up from an average of five to six years".1 McKinsey's Global Private Markets Report 2026 puts distributions (DPI) at 6 percent of assets under management in the twelve months to June 2025, against a 2015–19 average of 16 percent, estimates that more than 16,000 companies — 52 percent of buyout inventory — have been held for more than four years, and notes that just 19 percent of the companies acquired in 2021 had been sold by 2025. Fifty-four percent of LPs now rate DPI as "critical" or "most critical".2

Behind those figures sits a change in what a deal has to do to work. Bain's formulation is that "12 is the new 5": typical deals now require around a 10% to 12% average annual growth in EBITDA to generate the same benchmark 2.5X return that 5% used to deliver when leverage was cheap and multiples expanded.1 Bain's mid-year 2026 update adds a "triple shock" — an AI-driven rout in software valuations, redemption stress in private credit and an energy-price spike — that cut tech deal value by 70% between Q4 2025 and Q1 2026.3

The practical consequence for a board is simple to state. The owner is no longer optimising the exit multiple. It is optimising time-to-DPI: how quickly, and how defensibly, this asset can be turned into cash for a fund whose investors are asking for it. Every board decision — capital expenditure, an add-on acquisition, a refinancing, a CEO change — should be read through that lens, because that is how the owner is reading it.

What a PE board is for, and why it looks nothing like a PLC board

Sponsors build boards to control execution, not to satisfy a governance code. The survey evidence is consistent. In Gompers, Kaplan and Mukharlyamov's study of 79 private-equity investors, over 90% of portfolio boards had between five and seven members, with the sponsor typically taking "roughly 3 of the board seats while allocating one or two to management and one or two to outsiders".4 Executives who had sat on both public and private-equity boards told Acharya, Kehoe and Reyner that PE boards take a "leading" role in strategy where PLC boards "accompany" management, and that PLC boards give far more weight to governance compliance and risk.5 Cornelli and Karakaş found that in sponsor-backed UK public-to-private deals "outside directors are replaced by private equity members" and board size falls.6

None of this is a criticism. A small board with the owner in the room, working from cash-focused information, is a better instrument for executing a plan than a board of twelve reading a 200-page pack. The point is that independence on a PE board is a capability decision — an independent director is there for sector reach, operating experience or a specific problem — and not a control decision. That remains true right up to the moment when leverage, time and a struggling plan turn the board into the body that has to protect creditors, employees and the sponsor's own reputation. Invest Europe's Professional Standards Handbook is precise about the tension: sponsor-appointed directors "do not serve the interests of one particular shareholder but act in the interests of the portfolio company", and "it may therefore be advisable to have a different member of the GP staff or representative exercising shareholder consents".7 Most sponsors know this; fewer operate it.

Job one: own the value-creation bridge, and re-underwrite it at year three

The first thing the owner needs is a board that treats the value-creation plan as its own, not as management's homework. McKinsey's decomposition is the reason: for buyout deals done between 2010 and 2022, leverage and multiple expansion comprised 59 percent of returns; the remaining 41 percent came from revenue growth and margin expansion.2 The part of that mix the board can influence is now the whole return. Sponsors have responded by more than doubling the size of their operating groups since 2021,2 and by concentrating resources on the assets most likely to reward them — Bain's observation that "the biggest overall return often comes from making winners even better, not spreading resources evenly" is a statement about which portfolio companies will get the sponsor's attention and which will not.3

Two practices follow. The board pack should be built as a bridge from the underwriting case to the current run-rate — revenue, margin, cash conversion and net debt, each reconciled to what the investment committee approved — rather than as a monthly P&L with commentary. A board that cannot see the gap cannot close it. And at roughly year three, when the original plan's exit assumptions have lapsed, the board should insist on a formal second plan: a re-underwriting of the asset on today's numbers, today's rates and today's buyer universe. Academic work on 395 Western European deals found that about a third of deal IRR came from operating outperformance and that deal partners with operational backgrounds generated significantly higher outperformance in organic deals;8 the boards that deliver that outperformance are the ones that know, in writing, what they are trying to deliver.

Job two: decide the CEO question early, and decide it well

The second thing the owner needs is a CEO decision made deliberately rather than by attrition. The turnover data are stark, and the sources measure slightly different things, so they are worth quoting as they stand. McKinsey reports that "60 to 70 percent of PE-backed companies experience a CEO change during ownership, often within the first few years", with more than 60 percent of replacements being first-time CEOs.2 AlixPartners' 2026 Private Equity Leadership Survey finds that "65% of PE firms report CEO turnover during the holding period", that turnover "spikes around year two", and that "83% of PE executives say unplanned CEO turnover lengthens holding periods, and nearly half say it reduces returns".9 Heidrick & Struggles and AlixPartners put the unplanned share at 55%, note that "virtually all PE firms (97%) say they use external interviewers or formal assessments to evaluate CEOs, up from 61% in 2018", and yet find that only a quarter of firms have succession programmes and fewer than two in five portfolio companies run regular performance assessments.10

Read together, those figures describe an industry that has professionalised the assessment of CEOs without professionalising their succession, and that is paying for it in the currency it says it cares most about: time. The board's contribution is a structured assessment of the CEO and CFO within the first year, a succession file that exists before it is needed, and an honest conversation about incentives. Longer holds have hollowed out the traditional management equity story; as one search firm puts it, "the traditional trade-off, lower cash today for a large equity upside tomorrow, has been materially weakened by extended investment periods", and succession has moved "from a 'good governance' discussion to a commercial imperative" because buyers now price leadership risk as exit risk.11 For founder-led businesses the sequencing is different again, and we cover it separately in Part 5 of this series.

Job three: the chair as broker

The third thing the owner needs is a chair who can hold the relationship between an impatient fund and a management team that is six years into a four-year plan. Most European sponsors still fill the seat from inside: Russell Reynolds' 2025 interviews with private capital firms found that 70% of portfolio companies have internal chairs.12 That is efficient when the plan is on track. It is a weakness when investor perspectives diverge in a consortium deal, when the plan needs a mid-hold reset, when a first-time CEO needs a counterweight, or when the company is being prepared for a sale in which the sponsor's own conduct will be diligenced. In those situations the firms Russell Reynolds spoke to described external chairs "brokering investor-management relationships", managing "competing investor perspectives" and maintaining "productive tension between support and challenge", with measurable advantages in "decision-making velocity, stakeholder alignment, and exit readiness".12 The same research points to two ways sponsors get this wrong: choosing "impressive CVs over private capital-specific chairmanship skills", and relying on "informal, largely unmeasured, relationship-based models" of chair performance management rather than anything like the KPI frameworks applied to the CEO. A chair mandate with objectives, reviewed annually by the sponsor, costs nothing and fixes both.

Job four: keep the company solvent and reportable as the hold lengthens

The fourth thing the owner needs is protection from a risk sponsors are not used to thinking about. The finding that PE boards de-prioritise compliance and risk relative to PLC boards was benign when holds were four years and rates were near zero. At seven years, with refinancing windows narrowing and a plan that has already been rewritten once, it is the principal tail risk on the board's own liability.

The law here is unforgiving and jurisdiction-specific. In the United Kingdom, BTI 2014 LLC v Sequana SA [2022] UKSC 25 confirmed that directors' duty to consider creditors' interests engages when the company is insolvent or bordering on insolvency, or an insolvent liquidation or administration is probable; the weight given to creditors increases on a sliding scale until their interests become paramount, shareholder ratification is unavailable once the duty is engaged, and directors "are under a duty to inform themselves about the company's affairs".13 A leveraged, sponsor-backed company in year six of its plan is exactly the kind of company in which that sliding scale starts to move before anyone has called it a restructuring. In Spain, the Ley de Sociedades de Capital makes losses that reduce net equity below half of share capital a mandatory cause of dissolution, gives directors two months to convene a general meeting to dissolve or recapitalise, and makes them jointly and severally liable for company obligations arising after the cause if they do not.14 In Sweden, the Aktiebolagslag requires the board to prepare a kontrollbalansräkning as soon as there is reason to assume that equity has fallen below half of registered share capital, with personal liability for directors who fail to follow the procedure.15 A sponsor nominee sitting on a Spanish or Swedish board of a group held through a UK holding company is exposed under all three regimes at once, and the Invest Europe advice to separate the person exercising shareholder consents from the person sitting as a director is precisely the safeguard against the conflict those regimes create.

Reporting is moving the same way. The UK's Walker Guidelines were revised in December 2024, with a single enterprise-value threshold of £500 million and new disclosures on how the board promotes the company's long-term sustainable success and on its risk-management policies, including those relating to leverage.16 The Private Equity Reporting Group's eighteenth report, in December 2025, found that only 56% of reviewed disclosures reached a good standard and that eleven in-scope portfolio companies had not complied in full with any of the core components.17 A board that cannot describe its own leverage risk to a reviewer will struggle to describe it to a buyer's counsel.

What the owner needs, concretely, is a standing solvency and covenant dashboard — headroom, liquidity runway, the jurisdiction-specific equity triggers above — reviewed at every meeting and minuted, so that when the sliding scale starts to move the board can show it noticed.

Job five: manage exit optionality, including when the sponsor buys from itself

The fifth thing the owner needs is a board that has prepared the company to be sold — to anyone, including the sponsor. Despite the backlog, roughly 75% of buyout assets are still exiting above their next-to-last quarterly mark,3 and buyers increasingly diligence governance as an asset: Deloitte's contribution to the NACD's 2026 Governance Outlook observes that portfolio-company "boards increasingly formalize committee processes, such as documenting charters" as exit approaches, and that "audit and compensation committees, frequent board reporting, and independent director participation are routinely emphasized in management presentations to potential buyers".18

The harder case is the continuation vehicle. GP-led continuation vehicles grew 62% year-on-year in 2025 by Bain's count, though they remain below 10% of exit value;1 McKinsey puts them at 14 percent of sponsor-backed exits.2 A continuation fund is, from the portfolio company's perspective, a related-party sale in which the buyer, the seller and the party setting management's rollover terms are the same organisation. ILPA's 2023 guidance asked for a "true status quo option", a clear rationale and rolling LPs "no worse off"; its June 2026 draft update goes further, calling for a stronger evidenced commercial rationale, "fair and defensible pricing" and process integrity, which commentators read as a targeted competitive process supported by independent price validation and a properly resourced LPAC review.19 The board's contribution is to run and document an independent process for the company itself — a fairness view, a conflicts protocol, management rollover terms settled by the independent directors — so that the sponsor's process can withstand the scrutiny LPs are now promising to apply.

What the owner needs from the board this quarter

  • A bridge-to-underwriting board pack. Revenue, margin, cash conversion and net debt reconciled to the investment case, with the gap named.
  • A second plan by year three. Re-underwrite the asset on current numbers, rates and buyers; decide whether it is a company that will earn the sponsor's resources.
  • A CEO and CFO assessment cadence and a succession file that exists before the year-two spike arrives.
  • A chair mandate with objectives, and an honest answer to whether an internal chair is still the right instrument.
  • A solvency and covenant dashboard with the UK, Spanish and Swedish triggers built in, minuted at every meeting.
  • An exit-readiness plan and a conflicts protocol for any sponsor-led transaction, owned by the independent directors.
  • Technology and cyber oversight that a buyer would recognise — the subject of Parts 2 and 3 of this series.

The sponsor's reflexes — an internal chair, a thin independent bench, a CEO swap at year two, a continuation vehicle at year six — each made sense in a four-year, multiple-driven world. In a seven-year, DPI-driven one, the same reflexes are the things most likely to slow the money down. The board that understands the owner's maths is the board that can tell the owner so.

Related reading in this series

Disclaimer

This article is general commentary for professional readers. It is not legal, tax, financial or investment advice, does not address the circumstances of any particular company or fund, and does not create an advisor–client relationship with Cabo Advisory SL. Statutory provisions, market data and case law are stated as at the date of writing and change; take advice on the law of the relevant jurisdiction before acting.

Notes and sources

Footnotes

  1. Bain & Company, "Private equity resurgence gathers steam as new era challenges firms to enhance value creation — Bain & Company Global PE Report" (press release for the Global Private Equity Report 2026), 23 February 2026. https://www.bain.com/about/media-center/press-releases/2026/private-equity-resurgence-gathers-steam-as-new-era-challenges-firms-to-enhance-value-creationbain--company-global-pe-report/ ↩ ↩2 ↩3

  2. McKinsey & Company, "Global Private Markets Report 2026 — Private equity: Clearer view, tougher terrain", 10 February 2026. https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report/private-equity ↩ ↩2 ↩3 ↩4 ↩5

  3. Bain & Company, "Winning firms will focus on what they can control, weather the rest, as triple-shock brakes private equity's latest revival — Bain & Company 2026 Midyear PE report" (press release), June 2026. https://www.bain.com/about/media-center/press-releases/2026/winning-firms-will-focus-on-what-they-can-control-weather-the-rest-as-triple-shock-brakes-private-equitys-latest-revival-bain--company-2026-midyear-pe-report/ ↩ ↩2 ↩3

  4. Paul A. Gompers, Steven N. Kaplan and Vladimir Mukharlyamov, "What Do Private Equity Firms Say They Do?", NBER Working Paper 21133 (April 2015), published in Journal of Financial Economics 121(3) (2016), pp. 449–476. https://www.nber.org/system/files/working_papers/w21133/w21133.pdf ↩

  5. Viral V. Acharya, Conor Kehoe and Michael Reyner, "Private Equity vs. PLC Boards in the U.K.: A Comparison of Practices and Effectiveness", Journal of Applied Corporate Finance 21(1) (2009), pp. 45–56; ECGI Finance Working Paper 233/2009. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1324019 ↩

  6. Francesca Cornelli and Oğuzhan Karakaş, "Private Equity and Corporate Governance: Do LBOs Have More Effective Boards?", SSRN working paper (2008). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1102467 ↩

  7. Invest Europe, Professional Standards Handbook, section "Management of an investment". https://www.investeurope.eu/professional-standards-handbook/management-of-an-investment/ ↩

  8. Viral V. Acharya, Oliver Gottschalg, Moritz Hahn and Conor Kehoe, "Corporate Governance and Value Creation: Evidence from Private Equity", Review of Financial Studies 26(2) (2013), pp. 368–402; authors' summary, Harvard Law School Forum on Corporate Governance, 23 January 2013. https://corpgov.law.harvard.edu/2013/01/23/corporate-governance-and-value-creation/ ↩

  9. AlixPartners, "Nearly two-thirds of private equity firms replace portfolio company CEOs during the holding period, AlixPartners survey finds" (press release for the 11th Annual Private Equity Leadership Survey), 25 March 2026, https://www.alixpartners.com/newsroom/alixpartners-11th-annual-private-equity-leadership-survey/ ; survey page, https://www.alixpartners.com/insights/private-equity-leadership-survey-2026/ (427 respondents: 174 PE leaders and 253 portfolio-company executives, fielded October–December 2025). ↩

  10. Will Moynahan (Heidrick & Struggles) and Mark Veldon (AlixPartners), "Closing the leadership gap in private equity", Heidrick & Struggles, 27 January 2026. https://www.heidrick.com/en/insights/private-equity/closing-the-leadership-gap-in-private-equity ↩

  11. Marcus Shah, "Private Equity in an era of extended investment periods", Eton Bridge Partners, 13 January 2026. https://etonbridgepartners.com/blog/private-equity-in-an-era-of-extended-investment-periods/ ↩

  12. Ilana Abramowicz, Emma Combe, Symon Elliott, Rob MacMillan, Chris Nicholson and James Roome, "How Private Capital Can Unlock Value through External Board Chair Excellence", Russell Reynolds Associates, 7 October 2025 (based on interviews with more than 30 private capital stakeholders across EMEA). https://www.russellreynolds.com/en/insights/articles/how-private-capital-can-unlock-value-through-external-board-chair-excellence ↩ ↩2

  13. BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 (5 October 2022); see Goodwin, "BTI v. Sequana – What's new for directors in the zone of insolvency?", December 2022. https://www.goodwinlaw.com/en/insights/publications/2022/12/12_22-bti-v-sequana-whats-new-for-directors ↩

  14. Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital, arts. 363.1(e), 365 and 367 (consolidated text, BOE). https://www.boe.es/buscar/act.php?id=BOE-A-2010-10544 ↩

  15. Aktiebolagslag (2005:551), 25 kap. 13–18 §§ (kontrollbalansräkning and personal liability), Sveriges riksdag consolidated text. https://www.riksdagen.se/sv/dokument-och-lagar/dokument/svensk-forfattningssamling/aktiebolagslag-2005551_sfs-2005-551/ ↩

  16. Travers Smith, "Revised Walker Guidelines published", 18 December 2024 (revised Guidelines apply to financial years ending after April 2025). https://www.traverssmith.com/knowledge/knowledge-container/revised-walker-guidelines-published/ ↩

  17. Private Equity Reporting Group, Eighteenth Annual Report, December 2025 (98 portfolio companies and 65 firms in scope). https://www.privateequityreportinggroup.co.uk/Portals/0/Reports/Private-Equity-Reporting-Group-Eighteenth-Annual-Report-December-2025.pdf ↩

  18. Guy Langford, Jason Menghi, Christine Davine and Maureen Bujno (Deloitte), "How Board Governance Drives Value in Private Equity Portfolio Companies", NACD 2026 Governance Outlook, 10 December 2025. https://www.nacdonline.org/all-governance/governance-resources/governance-research/outlook-and-challenges/2026-governance-outlook/unlock-value-through-governance-in-private-equity-portfolio-companies/ ↩

  19. Institutional Limited Partners Association, "Continuation Vehicles" (2023 guidance and June 2026 draft update; consultation closed 5 August 2026), https://ilpa.org/industry-guidance/principles-best-practices/continuation-funds/ ; Jeff K. Davis, "ILPA's New Continuation Vehicle Guidance: Process Is the New Price Protection", Mercer Capital, 17 July 2026, https://mercercapital.com/insights/posts/2026/ilpa-s-new-continuation-vehicle-guidance-process-is-the-new-price-protection/ ↩