The Jammed Escalator
What every first-time portfolio company CEO should understand about the ride they're on.
The Jammed Escalator
What every first-time portfolio company CEO should understand about the ride they’re on.
Picture a pyramid.
At the top, a handful of names. Blackstone. KKR. The giants. In 2025, thirteen US funds each raised five billion dollars or more. Together they took in 137 billion — close to half of all the private equity capital raised in the country that year. And “five billion or more” hides a wide spread: five was the floor, not the ceiling. Thoma Bravo’s sixteenth fund alone closed at 24.3 billion. A handful of names at the top do not just raise more money than everyone else. They raise it in quantities that bend the shape of the whole industry.
Now flip the shape. At the base sit the companies. About 92% of private companies have revenue between ten and 250 million dollars. Many, many small businesses. A wide foundation under a narrow peak.
This is the PE pyramid. Most people who write about it stop here, at the picture. But the picture is static, and the thing it describes is not. The pyramid moves. Companies travel up it.
That movement is the part worth understanding. Especially if you now run one of the companies doing the traveling.
The tiers, top to bottom
Before the pyramid moves, see its rungs. Private equity is not one market. It is a stack of them, and each tier buys a different kind of company.
At the peak, the mega-funds. Blackstone, KKR, and a dozen peers, raising tens of billions at a time and buying companies worth billions each. Below them, the large-cap funds — still serious names, still managing many billions, writing equity checks in the hundreds of millions.
Then the middle. Mid-market funds are less famous but far from small: they buy established companies that already have real management, real systems, real scale. Below them sits the lower-mid-market — and this tier matters most to the readers of this piece, because it is the first institutional owner most founder-led companies ever meet. It is the tier that buys a company from the person whose name is on the door.
And at the base, the smallest tier and the largest in number: small-cap funds and deal-by-deal sponsors. Deal-by-deal is worth a moment. Most funds raise a blind pool — investors commit money before knowing which companies it will buy. A deal-by-deal sponsor does the opposite: finds the company first, then raises the money for that single transaction. It is private equity at its most granular — one sponsor, one company, one deal at a time.
Why a pyramid and not a column? Because the tiers narrow as they rise. Few funds sit at the top because few companies are large enough to be worth billions. Many funds crowd the base because that is where nearly all the companies are — the 92% in that ten-to-250-million band. Few large deals above, many small deals below. The shape is not decoration. It is supply.
The escalator
Here is the mechanic, in one sentence: a fund buys a company, makes it bigger and cleaner, and sells it to a bigger fund — which does the same, and sells again, higher up. The company rides up the pyramid. Each sale is a step.
And more and more, the buyer at the next step is another fund. Secondary buyouts — one sponsor selling to another — were 30.5% of all PE exits in the first quarter, up from 25.2% a year before. In the European mid-market the number runs higher still: sponsor-to-sponsor deals were 47% of Western European PE exits in the first half of 2024, up from 38% in 2021.
The industry calls it passing the parcel. It is an escalator, and your company is on it.
One company, four steps
Picture a single business making the climb. Call it an HVAC company — because in private equity writing, it is always an HVAC company. Heating and cooling, family-owned, 30 years old, two branches in one city, three million dollars of EBITDA. The founder is 64 and tired.
Step one. A lower-mid-market fund buys it for five times EBITDA — fifteen million dollars. A founder’s shop this size trades cheap; the small, owner-run businesses that feed roll-ups change hands at roughly four to six times earnings. The founder takes most of it in cash, rolls a slice into the new company, and stays a year. This first pass is the deepest change the business will ever go through. The fund hires a CFO — the company never had one — and often a new CEO, because running a founder’s local shop and running a buy-and-build platform are different jobs. Proper financial systems go in. Then the fund starts buying: other small HVAC shops, one town over, then the next. Four years later this is no longer two branches in one city. It is fifteen branches across a state, with twelve million dollars of EBITDA, most of it bought rather than grown.
Step two. A larger mid-market fund buys the company for nine times — 108 million dollars. Note the multiple jumped from five to nine. The same kind of earnings is now worth far more, because the buyer is paying for a built platform — scale, systems, recurring service contracts — not a single founder’s shop. The market prices a pile of small shops and a real platform as two different kinds of asset, and the gap between them is where the fund’s return lives. It has a name: multiple arbitrage. That is also why your fund may push for acquisitions faster than feels comfortable — it is racing the company across that line. The new owner widens the map — three states, then six — and upgrades the management team to match. The CFO who could run a twelve-million-dollar business is not always the one who can run a fifty-million-dollar one. Heads of HR, of M&A, of integration get hired. The business that entered this step regional leaves it national.
Step three. The company, now a national platform with sixty million dollars of EBITDA, sells to a mega-fund for sixteen times — nearly a billion dollars. That multiple is not invented: large, professionalized home-services platforms with heavy recurring revenue have traded in the mid-to-high teens. Blackstone paid roughly 2.5 billion dollars for one such HVAC, plumbing and electrical platform at about 18.5 times EBITDA.
The ladder, plainly: two branches in one city, then a statewide chain, then a national platform — earnings climbing from three million to sixty, and the multiple climbing from five to sixteen alongside them. The company got bigger. It also crossed from one kind of asset into another, and the market reprices each kind on its own terms.
Two forces run quietly underneath all of this.
Debt. Each step is bought with borrowed money, and growth-by-acquisition is funded with more of it. That brings covenants — promises to the lenders about leverage and cash flow — and a CFO whose job is now partly to keep the company inside them. A missed integration or a soft quarter is no longer just disappointing; it can trip a covenant. Debt management stops being a back-office task and becomes a board-level one.
Buying power. As the company grows, its relationship with its own suppliers inverts. The founder’s two-branch shop was a small customer who took the price it was given. A platform negotiating for dozens of locations sets terms instead — rebates, volume discounts, priority supply when equipment is scarce. That improved purchasing is itself a source of margin, and a real one, separate from anything the escalator does with multiples.
The business that changed hands is, in one sense, the same business. What changed is its size, its systems, its management, its balance sheet, its leverage over suppliers — and the multiple the market will pay for the whole. That is the escalator, drawn as one company. Each owner did roughly the same job — buy, build, professionalize, sell up — and each handed the parcel to someone bigger.
Now the important question for you. At which step did you become CEO? Because the job is not the same at each one.
Two rides, one escalator
Here is the part the picture hides.
The pyramid is not one machine. It is two rides bolted together. The escalator carries the company upward. But the experience of riding it depends entirely on which step you boarded at.
Board at the bottom — a lower-mid-market fund — and the ride feels like this. The fund bought your company cheap and with little debt. Small and mid-cap deals average 9.6x EV/EBITDA at entry against 11.4x for the giants, and carry leverage of 3.9x against 5.7x. Cheaper, lighter. That means the fund cannot get its return from financial engineering. It has to get it from the business itself. So expect operators in your boardroom often. Expect a value-creation plan with your name on it. And expect real growth to be the point: mid-cap companies grow revenue about 116% from a fund’s entry to its exit — 2.7 times the figure for large-cap deals.
Board near the top — a mega-fund — and the ride is different. Scale. A brand that opens doors. Patient capital that is not forced to sell on a clock. Specialist operating teams down the hall. But you are one asset among dozens, and the main levers are leverage and multiple, not your Tuesday-morning execution.
Neither ride is better. They are different. A first-time CEO should know which one they are on, because the two demand different things from the person in the chair.
One honest note before the metaphor hardens. The rides increasingly overlap. Mega-funds now run dedicated mid-market vehicles and reach down the pyramid. Strong mid-market funds graduate upward — many of today’s giants got big precisely because they performed. The escalator has shortcuts and side doors. Treat “two rides” as a way to see the structure, not a law the market obeys.
Roll-ups: real value, and its critics
The four-step climb above rested on one move: buying small shops cheap and assembling them into a platform worth a higher multiple. For much of the lower-mid-market, that is not a side detail. It is the main engine. And it is worth one honest paragraph, because it is also where the genre earns its critics.
Multiple arbitrage works whether or not the underlying companies got better. Roll-ups done well are genuine consolidation: shared back office, real purchasing power, stronger management, better service. Roll-ups done badly are leverage and accounting — more debt, thinner staffing, a platform held together for the multiple and nothing else. Vet clinics, dentistry, and other consumer-facing roll-ups have drawn fair scrutiny on exactly this point.
If you run a platform, know which kind you are building. The next buyer will look hard, and so should you.
The first hundred days
Step one called this “the deepest change the business will ever go through.” Worth knowing what it feels like from the chair, because it usually starts fast and it usually stings.
The early priorities rarely vary: trustworthy monthly accounts, a real CFO, a real board with real packs, working systems — an ERP, a data room, contracts signed and filed. None of it is glamorous. All of it is the point. The founder built a business that ran on instinct and memory. The fund needs one that runs on process, because process is what the next owner up the escalator pays for, and instinct does not survive a sale.
For the person in the chair, this is the hardest stretch. You may be hiring peers who know things you do not. You may be installing systems that slow the company before they speed it. You may be answering to a board that asks sharper questions than anyone ever asked the founder. That discomfort is not the process failing. It is the process working.
A word on returns, honestly told
You will hear that smaller funds beat bigger ones. The data supports it. Median net IRR for mid-market funds ran 14% from 2006 to 2021, against 12.9% for large-cap.
But the average hides the real story. Small-cap funds show far wider dispersion between their best and worst performers than large funds do. The gap between a top-quartile and a bottom-quartile small fund dwarfs the gap between size categories. “Small-cap outperforms” is really “top-quartile small-cap outperforms, and the rest is a coin toss.”
For you, that means the size of your fund matters less than its quality. A good small fund is a genuine advantage. A weak one is a liability the league tables will not warn you about.
And the giants are not the weak option. Large funds manage 46% of global buyout assets, up from 35% in 2015, with strong median performance and less downside at the bottom of the range. They are a steadier ride. Steady and sharp are simply not the same ride.
Why the escalator jams
An escalator only works if the step above keeps moving. Lately, the steps stick. And they stick differently at the top and at the bottom.
The jam at the top is the weather. The escalator only carries a company up if the buyer above can pay more. Since 2022, higher rates slowed the gears. Distributions to investors, measured against fund size, sit near record lows — money goes in, less comes back. Firms now hold more than 30,000 portfolio companies, many bought at high prices, waiting. Rather than sell into a weak market, funds re-wrap assets in continuation vehicles; those hit a record 68 billion dollars in 2024. The company does not move up a step. It gets repackaged on the step it is already on. This jam is macro. No CEO fixes it.
The jam at the bottom is readiness. A step also sticks when the company is not ready to take it. Integration half-finished. Earnings not clean. No clear story for why the next owner should pay more. The fund above underwrites a plan; if there is no plan to underwrite, there is no deal. This jam is not the weather. This one is yours.
What this means for you
You cannot pick the weather. Rates, exit windows, the pace of distributions — none of it answers to a portfolio company CEO.
You can do the other thing. You can know your ride, and you can prepare your step.
If you are on the lower-mid-market ride, the work is hands-on and the clock is three to five years and the plan has your name on it. More levers exist precisely because the company was founder-led and never run by institutional owners before. That is opportunity. It is also a job, and the job is yours.
Build the business so that the next buyer can underwrite it cold — clean numbers, finished integration, an obvious reason it is worth more now than when your fund bought it.
You cannot clear the jam at the top. You can clear the one at the bottom. That is the whole job.
Sources: PitchBook, KPMG Private Equity Pulse, Bain Global PE Report, Jefferies Global Secondary Market Review, J.P. Morgan Asset Management, Pantheon, Hamilton Lane, iCapital, GCM Grosvenor.