Yale Case. By: Daniel Lazier, Jacob Thomas, and A. J. Wasserstein
This Yale Case analyzes how EV is created in SF investments, using data from 59 exited companies representing roughly 35% of known traditional SF exits. The authors decompose value creation into three core drivers: EBITDA growth, EBITDA margin changes, and EBITDA multiple expansion, intentionally excluding leverage.
The central finding is striking: approximately 80% of total EV creation comes from EBITDA multiple expansion, while only 20% comes from EBITDA dollar growth. This contradicts the conventional belief that operational improvements, especially margin expansion, are the primary drivers of value in ETA businesses.
When EBITDA growth is further decomposed, the study finds that revenue growth is strong and widespread, but EBITDA margins consistently decline. On average, revenue growth contributes more than 100% of EBITDA gains, while margin contraction offsets a large portion of that increase. Margin expansion is rare; about 70% of firms experience margin compression during the holding period.
Firm-level and histogram analyses confirm that these aggregate results are representative of individual companies. Most firms benefit from multiple expansion, most grow revenue, and most see EBITDA margins deteriorate. Notably, EBITDA multiple expansion is largely uncorrelated with EBITDA growth, revenue growth, or margin improvement when examined individually.
Multivariate analysis reveals a more nuanced result: multiple expansion is positively associated with revenue growth and negatively associated with margin growth. This suggests a trade-off in which CEOs who invest aggressively in growth (often at the expense of short-term margins) are rewarded with higher exit multiples. However, the authors stress this is an association, not a causal prescription.
The study also highlights broader structural drivers of multiple expansion, including rising market multiples over time, firm size effects, private equity buyer dynamics, strategic acquirer synergies, and the role of investment bankers in competitive exit processes. These forces imply that a significant portion of value creation reflects market beta and timing, not purely CEO operational skill (alpha).
In conclusion, the paper argues that SF success today is fundamentally a multiple-expansion story, not an operational margin-improvement story. Revenue growth matters, margin expansion is uncommon, and exit valuations dominate returns. This reliance on terminal value increases risk and raises important questions about CEO incentives, sustainability of returns, and the future role of operational excellence if market multiples compress.
Read the full case in: https://som.yale.edu/sites/default/files/2026-01/AMathematicalAnalysisofValue-CreationAttributioninSearchFundProjects.pdf
What the data really tells us:
This analysis provides one of the clearest, most data-driven looks to date at how value is actually created in traditional SF investments. While many of the conclusions may feel uncomfortable to operators and investors alike, the results ring true to anyone who has spent time underwriting, operating, or exiting ETA businesses over the last decade.
Below are some key takeaways and interpretations:
1/ SFs are fundamentally a multiple arbitrage business, whether we admit it or not
The headline result is unavoidable: roughly 80% of enterprise value creation comes from EBITDA multiple expansion, not from EBITDA growth. This is not a marginal effect, it dominates outcomes.
In practice, this means that SF returns are heavily dependent on:
- Market multiple inflation
- Asset migration up the PE food chain
- Buyer competition at exit
- Lower cost of capital for larger pools of capital
Operational improvements matter, but they are secondary. This is a major departure from the original philosophical roots of the asset class, which assumed flat multiples and value creation through operational excellence alone.
Implication: SF returns today embed a large bet on market beta. If exit multiples normalize, many “good” operators will still struggle to generate target IRRs (35%).
2/ Revenue growth is the real operating lever, margins are not
One of the most counterintuitive but convincing findings is that EBITDA margins systematically decline during SF ownership. This is a pervasive pattern.
At the same time:
- Revenue growth is strong and widespread
- EBITDA dollars increase despite margin compression
- Buyers do not penalize margin decline at exit
This aligns with what experienced sellers know: buyers underwrite future scale and platform potential, not static efficiency. Investments in sales, systems, talent, and infrastructure often depress margins in the short term but enhance the equity story.
Interpretation: The market implicitly rewards strategic reinvestment over margin maximization. Search CEOs who protect margins at all costs may actually be hurting exit value.
3/ Margin compression is not a failure, but unintentional compression is
The data shows a negative association between margin growth and multiple expansion. This does not mean that destroying margins creates value. Rather, it suggests two very different margin stories:
- Intentional compression: investing ahead of growth, professionalizing the business, building a platform
- Unintentional erosion: operational drift, pricing leakage, cost creep
Only the first is value-accretive.
Key risk: Many CEOs and boards fail to clearly distinguish between the two. The danger is not margin compression per se, but margin compression without narrative, metrics, or control.
4/ Search CEOs are better dealmakers than operators
The study indirectly confirms something long suspected: SF CEOs disproportionately create value as buyers and sellers, not as best-in-class operators.
This is not a criticism. Most searchers come from M&A, consulting, or PE backgrounds. They are trained to:
- Buy assets well
- Structure incentives
- Tell a compelling exit story
- Run a competitive sale process
Operational excellence improves outcomes, but it is rarely the dominant driver of value.
Strategic takeaway: Search CEOs should build management teams early and aggressively. Their highest leverage activity is capital allocation and strategic positioning, not day-to-day optimization.
5/ Timing risk and terminal value risk are underappreciated
Because value creation is so heavily back-ended and multiple-driven, SF returns are unusually sensitive to exit timing.
This has several implications:
- IRRs may look strong ex post, but risk-adjusted returns may be overstated
- Cash-flow-heavy, dividend-paying strategies may deserve more attention
- Overreliance on terminal value increases fragility in down markets
If exit multiples compress meaningfully, the entire ETA return profile changes.
Investor perspective: Portfolios that rely exclusively on multiple expansion may deliver volatile outcomes across vintages.
6/ Incentive alignment deserves a rethink
If a large portion of value creation comes from macro forces rather than operator alpha, we should ask an uncomfortable question: Are we compensating CEOs primarily for skill, or for being in the market at the right time?
This does not diminish the difficulty of the job, but it does suggest that:
- Equity incentives may over-reward beta
- Margin discipline and cash generation may be underweighted
- Boards should be explicit about what behavior they want to incentivize
This is not a call to reduce CEO upside, but to better align it with controllable value creation.
Final thought: The asset class is maturing, and the illusions are fading
This paper is valuable precisely because it strips away mythology. SFs work. They create wealth. But they do so in ways that are more market-driven, more timing-sensitive, and less operationally heroic than the popular narrative suggests.
For aspiring searchers, this should not be discouraging, it should be clarifying.
Understanding where value truly comes from allows better decisions on:
- Growth vs. margin trade-offs
- Capital allocation
- Exit preparation
- Risk management
In the next phase of the ETA market, the winners will be those who understand multiple dynamics deeply, invest intentionally, and prepare for a world where multiple expansion is no longer guaranteed.
