Sprint to the Exit: Beware the Late-Stage Margin Growth in Buyout Companies

In private-equity portfolio companies, the growth in EBITDA margins (the measure of operating profit as a proportion of revenue) tends to trace a horizontal hockey-stick pattern. Median EBITDA margins sit below entry levels for much of the holding period, but into the final six quarters before exit, margins break into a sprint — a pattern consistent across every exit year since 2014. This late-stage “margin sprint” may require incoming acquirers to deepen their margin-focused due diligence and compel limited partners (LPs) to recalibrate distribution expectations.  

Since 2014, the median EBITDA margin of portfolio companies slipped by about 0.7 percentage points (pp) in the first year after investment, then contracted by roughly 0.1 pp annually. Within the final six quarters before exit, median margins rebounded by about 1 pp — a burst we will refer to as a "sprint,” given its sharp pace versus the preceding flat-to-declining margin growth throughout the holding period.  

Data as of Q1 2025. Each dot marks the exit year, while the accompanying line traces the since-entry median margin growth over the holding period leading up to that exit. Source: MSCI Private Asset and Deal Metrics data 

In recent years, portfolio companies that delivered a jump in EBITDA margin have constituted a larger proportion of buyout exits. Holdings with at least a 3-pp margin surge in any one quarter during the final six quarters before sale accounted for an average 57% of buyout exits between 2021 and Q1 2025 (on a four-quarter moving-average basis). In 2014–2020, the average was 44%. 

Data as of Q1 2025. Each dot marks the four-quarter moving-average share of exited holdings with at least 3 pp of annual EBITDA-margin growth at any quarter during the six-quarter window before exit. Source: MSCI Private Asset and Deal Metrics data

The trend highlights how sellers are increasingly leaning on sharp margin expansion to defend valuations in a market still wrestling with higher-for-longer rates and compressed multiples. But it also hands incoming buyers a pair of key due-diligence questions.

First, buyers — including those in sponsor-to-sponsor transactions — may need to determine whether these sharp margin expansions reflect durable efficiency gains (such as automation, scaled procurement and pricing power), rather than a flurry of one-off cost deferrals or accounting tweaks designed to shine just long enough for a sale to close.

The second question is whether, with margins already stretched, there is room for further margin growth under the new ownership, especially in a potential stagflation scenario where revenue growth is muted and input cost inflation remains sticky.

The need to improve margins has become increasingly relevant for distributions to LPs on two fronts: first, in the case of an outright sale of the company, where LPs receive their share of exit proceeds; and second, in the case of a change in the capital stack in a “dividend recap,” where the company takes on new debt in order to fund a special dividend distribution to LPs.

Regarding exit proceeds, buyout portfolio companies with positive growth in EBITDA margin appear to have been prioritized for sale. This approach has cushioned the impact of compression in valuation multiples since 2022.

Apart from the impact on outright-exit multiples, margin expansion can also increase a company’s ability to take on additional debt and shoulder the corresponding interest payments. In the case of a dividend recap, this debt is used to restructure the balance sheet, allowing equity holders a rewarding distribution while retaining ownership and future upside in the company.

Could margin expansions therefore be the harbinger of good news for LPs looking for more distributions? Between 2020 and Q1 2025, portfolio companies’ annual margin growth and the annual growth in fund-level distribution rates tracked closely.¹ The contemporaneous correlation was 0.84 in this period, compared to just 0.32 in 2014–2019. Incorporating a one-quarter lag for distributions, the 2020–Q1 2025 correlation was even stronger at 0.91. Put simply, margin growth in one quarter was associated with a jump in the distribution rate the very next quarter. The higher correlation since 2020 underscores the increased relevance of margin growth in LP distributions and in value creation for both exited and held assets.

Data as of Q1 2025. Source: MSCI Private Capital Universe, MSCI Private Asset and Deal Metrics data

The message is that, in today’s market, LPs need to monitor margin momentum to anticipate potential swings in their distribution streams. Annual margin growth decelerated steadily from Q3 2024, slipping to just 0.04 pp by Q1 2025. Over the same time span, the annual LP distribution rate mirrored this slowdown and finally turned negative in Q1 2025. The slowdown in margin growth signals that the LP liquidity drought may be far from over.

For both asset owners and potential acquirers, there are some key messages to heed. First, margin sprints are real and observable and tend to happen toward the end of private-equity ownership. Second, in recent years, margin sprinters have captured a growing share of those companies that GPs were able to exit successfully in an otherwise difficult environment. On the flipside, that means potential buyers should test diligently whether the margin expansion is real and sustainable, or engineers one-off effects that may disappear over time. And finally, the patience of LPs longing for increased distributions from their private-equity portfolios may be tested even further: Most recent aggregate changes in EBITDA margins point toward a continued liquidity drought.