Five of the 12 largest PE deals in 2025 were a carve-out. As we flow through 2026, carve-out activity is high as corporates react to challenging economic conditions, macroeconomic strain and the emerging disruption AI brings to legacy business models. We expect this trend to run through this year and continue as separation activity delivers in 2027 and 2028.
However, despite their growing popularity, if we look at the figures, carve-outs deliver the lowest multiple on invested capital (MOIC) of any asset type.
Gain.pro’s recent analysis suggested a 2.3x MOIC vs sponsor-to-sponsor deals, which were 2.7x on average. MOIC of less than 1x was also most prevalent in carve-outs, with one in 10 deals resulting in a loss – more than double the 5% loss rate for sponsor-to-sponsor deals.
These two data points are curious. How can it be that carve-out deals are so popular, yet do not deliver value to the same level as alternative deals? The answer lies in how the deals are analysed
Shifting the focus from risk to return
Carve-outs are complex, and carry an elevated, embedded level of business and operational risk. For decades advisers, investors, management teams and vendors have focused attention on risk control and not enough on upside, value capture and growth. Separation processes have been designed to control risk, deliberately deploying a slow and steady approach to execution – while this has merit, the slow pace of change trades off against business growth and focus.
It is this shift in emphasis, with the opportunity to unlock previously unrealised value through carve-out, that is underpinning its growing popularity.
Those who buck the wider market trend and drive successful carve-outs are able to deliver against the deal thesis and value capture plan, alongside an efficient separation programme – without allowing the latter to take all the focus from the management team.
In our experience of supporting mid-market private equity and portfolio companies, there are five key principles that support successful deals:
1. Value capture starts during the deal
Vendors sell what they want to sell, and often these assets are the unloved part of the business. Buyers should be aware that the perimeter may not be the business they want or need to drive their plan. Assess the perimeter diligently alongside the value capture plan, and propose amendments to rebalance the deal.
2. Front-load separation strategy
Define the practical transition service agreement (TSA) delivery mechanics and exit criteria during diligence, not after signing. Too often the focus pre-deal is on the “what” of the TSA, not on the “how”. After signing, the buyer’s negotiation leverage is impaired and the ability to make changes can become expensive. Buyers should have a view to their exit criteria during diligence to avoid unnecessary and costly extensions.
3. Rebuild the standalone cost base
Don’t just accept the seller’s cost allocations on the first pass. These costs are often presented in favour of the vendor, and often with limited detailed assessment – when pushed they may not stand up well to diligence. Buyers should rebuild their version of the standalone model and bridge this against the seller’s view – negotiating on the downside and preparing internally for the upside.
4. Get Day 1 right
Be it standalone or supported via TSA, the business must operate smoothly on Day 1. A structured 100-day plan that addresses separation dependencies, supplier transitions and capability gaps is a must-have for carve-out deals and the earlier it is produced, the fewer surprises there are at completion.
5. Negotiate, then collaborate
While all deals are hard-won negotiations, carve-outs have particular ramifications for how teams shift between negotiation friction to collaborative team-working. Firstly, the negotiation doesn’t stop at completion. Deal leads and steering committees will continue to negotiate on TSA service, duration and cost as the business is separated. Secondly, delivery teams need to work collaboratively to drive the separation programme at pace. Governance should be structured carefully to ensure that delivery teams focus on working together to deliver the carve-out, and are kept out of the negotiating room. If they are, separation execution becomes a negotiating chip at everyone’s expense.
None of this is novel, and yet none of it is consistently done. When best practice is brought to a strong underlying business, the chances of success are far greater, defying the trend of a lower MOIC.
However, this often assumes that there is ample time to conduct the assessment, coordinate the teams, deliver the deal and build value as the separation is executed. In reality, deal timelines are brief and the burning platform for change post deal has an expiry date. Where the technical complexity of the carve-out overrules the speed needed, value is eroded.
Successful carve-outs are delivered by teams engaged early, with the expertise to move quickly, treat risk control as a given, focus on value throughout the deal lifecycle and work constructively across the negotiating table.
