Private Equity’s Operating Model Needs Real Execution, Not Just Governance Theatre, Says Lee McCabe

In a recent LinkedIn post, Lee McCabe discusses the evolution of private equity’s operating model, arguing that the traditional approach, heavily reliant on cheap debt and market tailwinds, is no longer sufficient. McCabe, who recently delivered a keynote at SuperReturn Operating Partners Miami, suggests that the industry’s past success was often a product of favorable market conditions rather than genuine operational value creation.

McCabe highlights the shift in market dynamics that necessitates a more robust approach to value creation. He points out the increased pressure on portfolio companies to achieve higher growth rates, a significant departure from previous eras.

“The weather changed and a lot of firms discovered the ‘operating model’ was mostly just cheap debt, forgiving exits, and a decent haircut.”

According to McCabe, for years, private equity firms could mask a lack of substantive operational improvement with what he terms “governance theatre.” This often involved superficial measures such as quarterly board meetings, basic dashboards, and operating partners who possessed opinions but lacked the authority to implement meaningful change. This charade worked because the market was inherently supportive, contributing significantly to returns.

The Shifting Growth Imperative

The core of McCabe’s argument centers on the drastically altered financial landscape. He quantifies the increased pressure on growth, noting a substantial rise in the required EBITDA growth to achieve target returns.

“For years, PE could get away with governance theatre and call it value creation. Quarterly board meetings. A few dashboards. An operating partner with plenty of opinions and very little authority. Everyone nods. Nothing changes,” McCabe writes. He elaborates on the financial reality:

“To get to the same 2.5x MOIC over five years, firms used to need about 5% EBITDA growth. Now they need 10 to 12%.”

This stark reality, encapsulated by his observation that “12 is the new 5,” signifies a fundamental challenge for the industry. McCabe asserts that growth is no longer an option but a necessity, demanding rigorous execution.

The Evolving Role of Operating Partners

In light of these challenges, McCabe emphasizes the need for a more empowered and effective role for operating partners. He argues that the days of operating partners acting as mere advisors or “part-time therapists” for management teams are over.

Mandate, Cadence, and Authority

McCabe advocates for a redefined operating partner function, one that is equipped with clear mandates, a structured cadence for engagement, reliable data, and, crucially, the authority to intervene proactively. This is essential to avoid the common pitfall of attributing poor performance solely to market conditions in the later stages of an investment.

“Which means operating partners cannot be part-time therapists for management teams. They need mandate, cadence, data, and the authority to intervene before year three arrives and everyone starts blaming ‘the market.’”

The implication is clear: future success in private equity will hinge on the ability of firms to drive tangible operational improvements rather than relying on financial engineering or market appreciation alone. As McCabe concludes:

“The next era of private equity will not be won by the firms with the smartest deck. It will be won by the firms that can actually operate.”

Lee McCabe’s analysis underscores a critical juncture for the private equity industry, calling for a return to operational fundamentals and a more hands-on, authoritative approach from those tasked with value creation.