Operational resilience in private equity: building a business that performs under pressure

The private equity middle market is the engine room of the industry.

It accounts for almost three quarters of the pool of investable companies, and for the last 20 years top quartile middle market funds have outperformed their large cap counterparts by 4.5%, according to analysis from Pantheon.

For decades this outperformance has been driven by entrepreneurial middle market private equity firms led by concentrated teams of experienced dealmakers, who leveraged personal networks and individual deal skills to originate proprietary deal flow and generate strong returns on exit.

The formula for middle market private equity success, however, is changing as the industry expands and the deal market shifts. Global private equity assets under management (AUM) have grown more than ten-fold over the last 25 years to exceed US$10 trillion, according to KKR. The industry is bigger, more competitive and increasingly sophisticated, and delivering returns is becoming more difficult as entry multiples increase, leverage multiples moderate and financing costs rise.

Operational resilience becomes a competitive advantage

Today, private equity’s growth, coupled with the high levels of uncertainty managers and investors face at this point in the cycle, poses significant challenges for the resilience of the traditional middle market private equity operating model.

Allocations to private equity are substantially larger, making LPs more sensitive to downside risk and less comfortable with depending entirely on a handful of veteran managers to steward capital through a particularly volatile market.

When a firm’s dealmaking experience, track record, and accumulated knowledge are tightly concentrated in the hands of a few senior partners, a firm becomes vulnerable.

This fragility becomes more apparent in market headwinds, when the volume of crucial decisions multiplies and firms grapple with dips in portfolio company earnings, delayed exit timelines and prolonged fundraising. Concentrated leadership and a lack of established processes make senior partners a bottleneck for urgent decision-making in a market where responsiveness is essential. In the worst-case scenario, where the pressure becomes too great, a concentrated leadership structure can fracture irreparably.

Key person risk, often referred to as key man risk, has always been on the radar for LPs. With more capital now at stake and a tougher operating environment to contend with, this sensitivity has heightened even further.

Operational resilience means having the processes, systems and organizational depth to keep a private equity firm functioning as people, markets and requirements change. LPs are therefore seeking managers that can demonstrate this depth, rather than depending entirely on specific individuals. Personnel changes are not the only disruption a resilient operating model must be prepared to absorb.

Building a flexible private equity operating model

Middle market private equity managers can build this fund operations infrastructure without adding significant headcount or taking on high upfront capital investment.

Automation, technology and agentic AI are allowing smaller GPs to reimagine the volume and quality of work their operational teams can produce (see Part 2 in the series). By partnering with a global third-party fund services provider, they can access private equity fund administration, accounting and reporting technology without building those capabilities from scratch.

The way middle market private equity firms operate is changing, but the expertise and technology are available to help GPs make the leap from successful entrepreneurial firms, where performance is inextricably linked to the founders, to operationally resilient institutions that can thrive through whatever comes next.

Preparing private equity operations for cyber risk and regulatory change

As technology becomes more embedded in private equity operations, LPs are also factoring managers’ readiness to withstand cyber disruption and regulatory change into allocation decisions.

Cybersecurity is front of mind for all financial institutions. More than four-fifths (82%) of banks, insurers and asset managers surveyed by the Bank of England cited cyberattack as a top-five risk to the financial system, up 10 percentage points from the previous poll.

Organizations are also increasingly economically exposed to cloud infrastructure outages. The cost of system downtime, according to research from Splunk Technology, a Cisco company, has climbed 50% during the last two years and led to a 3.4% average decline in the equity values of the Global 2000 companies.

These risks are not confined to large organizations and pose real challenges for middle market private equity managers, who investors increasingly expect to meet the same standards of contingency planning and risk management as much larger firms. LPs expect GPs, irrespective of size, to have business continuity plans, fallback systems and emergency protocols in place to recover from disruption and continue delivering core functions.

The resilience of GP operations has been further stretched by continuous regulatory change. The UK’s Financial Conduct Authority (FCA) is consulting on reforms to the UK Alternative Investment Fund Manager (AIFM) regime that could lead to rule changes across valuations, liquidity risk management, annual reporting, investor disclosures and marketing. The European Commission is proposing amendments to the Sustainable Finance Disclosure Regulation (SFDR), tightening eligibility criteria for ESG-linked financial products; and the US Securities and Exchange Commission (SEC) is reportedly increasing scrutiny of potential conflicts of interest in continuation vehicle (CV) deals, as well as opening examinations of private fund valuations.

LP reporting and transparency come under greater scrutiny

Increasing regulatory workloads have been matched by intensifying LP expectations around fund reporting, transparency and disclosure. LPs are pushing GPs to include special rights to view internal fund information in fund documentation, particularly around sensitive issues such as asset valuations and conflicts of interest.

There are ongoing challenges for GPs to address, and the margin for error is narrowing.

A multi-firm review of valuation processes for private market assets published by the FCA in 2025 found that most firms only partly identified and documented valuation-related conflicts linked to investor marketing, secured borrowing, asset transfers, redemptions, subscriptions, uplifts and volatility. It also found that many firms did not have defined processes for ad hoc valuations during market events.

This was echoed in the most recent Institutional Limited Partners Association (ILPA) LP Sentiment Survey, which recorded a decline in LP perception of GP behavior with respect to governance terms, conflicts of interest and valuations.

Middle market private equity managers that tackle these LP concerns head-on are gaining an edge in a crowded market, but doing so requires a resilient operating model that can improve and deepen LP reporting and disclosure.

Resilient operating infrastructure is also fundamental for middle market firms seeking to diversify their investor bases in a tight fundraising cycle and unlock capital through alternatives to the 10-year closed-end fund. According to McKinsey, separately managed accounts, co-investment and evergreen fund structures have boosted global private equity AUM by trillions.

New private equity fund structures present middle market managers with a significant opportunity to grow their franchises, but they also add complexity to fund operations. More structures must be administered, often with additional reporting requirements such as producing monthly net asset value (NAV) figures for evergreen vehicles.

Firms that lack rigorous operational infrastructure will struggle under the weight of these demands, while better-prepared competitors will be positioned to grow.

How Alter Domus supports resilient private equity fund operations

Alter Domus gives middle market managers access to a private equity fund services platform with a level of operating resilience that is difficult for a GP to replicate in isolation.

Our global team of 7,000 professionals combines private markets expertise with leading technology to stay ahead of regulatory change and shifting reporting expectations. We have the depth and infrastructure to scale middle market fund operations, helping managers adapt quickly as requirements and workloads increase.

A platform of this size also has the resources and economies of scale to make sustained investment in proprietary technology, automation and AI commercially viable.

GPs can use this outsourced operating infrastructure and scale it with their own growth, without incurring the upfront capital and ongoing maintenance costs of building it in-house.

As a proven global operator that maintains ISO and SOC accreditations for business continuity management, internal controls and information security, Alter Domus has the tools to help middle market firms maintain continuity when faced with uncertainty, and adapt to change with confidence.