Private Equity and the Architecture of Scale

I was talking with my friend Jacob about my recent post on preparing companies for growth. He then sent me a link to an episode of the Financial Times podcast Unhedged titled "Private Equity’s Public Reckoning".

The episode explains why in recent times, private equity exits aren’t happening as planned and why the once-reliable promise of 20% internal rates of return (IRRs) is harder to realise in practice. The podcast hosts describe the Private Equity industry as “constipated”. As interest rates rise, leverage is no longer cheap, valuation expectations are hard to achieve, and exits have slowed dramatically.

For years, the scaling narrative has been mostly discussed in financial terms: acquire, optimise, lever, expand, improve margins, and exit at a higher multiple. This arithmetic works well when capital is cheap.

In such environment, modest operational improvements (i.e. higher margins and/or lower costs), when amplified by leverage, were often sufficient to generate very attractive IRRs. But IRR is highly sensitive to timing, so small changes when capital is deployed, can meaningfully alter the top figure. Performance metrics can therefore appear stronger than the company’s structural readiness to scale might suggest.

Private equity excels at discipline: KPI dashboards, cost control, working capital rigour, clean reporting lines. It has undeniably professionalised many companies. And these are not trivial achievements. These changes are often what a mature business needs.

But optimisation is not the same as scaling, at least not in the sense I have written about before. Scaling requires the deliberate alignment of systems, processes and people so that growth becomes sustainable. Without that alignment, expansion increases complexity faster than capability, and what looks like momentum can quickly turn into pressure and instability.

Finance cannot by itself absorb operational complexity. If a business intends to expand internationally, integrate acquisitions, and grow market share through consolidation, it must evolve into something closer to a platform designed to absorb complexity, replicate capabilities across markets, integrate new units without reinventing itself each time, and sustain growth.

Platform economics means that each additional geography, acquisition or product line becomes easier and cheaper to integrate than the last. It means marginal cost declines as scale increases. It means knowledge flows across the organisation rather than sitting in silos. It means supplier relationships, data, brand and distribution reinforce each other. That only happens through strategic planning and oversight.

It requires re-designing the organisation at the level of People: leadership structures that clarify accountability, talent capable of managing integration, and a culture to absorb repeated change without losing coherence. It requires strengthening Processes: cross-functional coordination, and replicable expansion playbooks. And it requires investing in Systems: shared data infrastructure, interoperable platforms, and digital architectures that allow information to flow so that each acquisition or new market plugs into a common digital backbone rather than creating a new silo.

It is also worth remembering that private equity most often deploys capital in well-established businesses that are operationally sound, asset-heavy, and have steady cash flows. This happens more in traditional-industries rather than with rapid technology disruptors. But because they are mature, their next phase of growth cannot rely on incremental improvement alone. They require rethinking how the organisation integrates knowledge, coordinates across units, and scales across geographies.

This is where digital transformation becomes unavoidable. Scaling through an acquisition-led strategy demands abstraction. The business must learn to see itself as data. Knowledge has to be codified, owned, and governed. Systems must interoperate. Workflows must be standardised. New acquisitions should connect to a shared data warehouse, not operate as fragmented silos.

In some cases, this may even involve building a digital twin: a simulation layer that allows the company to test scenarios before committing capital in the real world. While digital twins are sometimes dismissed as ambitious technology projects, they can serve a practical purpose. Properly designed, they are tools for risk management, a way to rehearse integration, stress-test assumptions, and prepare the organisation for scale.

Private equity bring capital, which is a powerful accelerant. Acquisitions are a legitimate growth strategy. International expansion is a rational ambition. But there is a sequence. First, build the hub company into a scalable system. Then, add capital. Then, acquire.

If the hub lacks:

• Cross-functional integration
• Replicable expansion playbooks
• Standardized workflows
• Data governance
• Digital backbone
• Integration discipline

… then each acquisition will increase complexity faster than capability can absorb them.

When readiness precedes leverage, capital amplifies capability. When leverage comes first, it can accelerate results without fully strengthening the foundations. In the long run, foundations matter.