The difference between exceptional returns and portfolio write-downs is often hidden beneath the surface in the high-stakes private equity world. Like individuals projecting health while masking unseen vulnerabilities, target companies and assets under management (AUM) can present impressive financials or market positioning while harbouring critical operational friction or deep customer disconnects.

Relying solely on traditional due diligence and standard business metrics creates a dangerous illusion of control, potentially anchoring investment thesis to internal assumptions rather than the stark, often uncomfortable, reality lived by the asset's own customers – the ultimate arbiters of brand value and success. History ensures that surface indicators are dangerously unreliable, and mistaking luck for skill based on past performance is a risk LPs can ill afford. At the same time, GPs face increasing pressure to demonstrate consistent, repeatable value creation.

Addressing these fundamental challenges in private equity – differentiating skill from luck and achieving truly repeatable value – requires a new depth of insight. It requires a new lens. This white paper presents a rigorously developed, tested and refined solution, the SØRENSEN Organisational CT Scan™, designed to provide this crucial insight with the aim of establishing a new global standard for due diligence and value creation.

Treating visible symptoms in portfolio companies – such as lagging sales or budget overruns – with outdated playbooks or superficial fixes is costly, unsustainable, and fails to address the underlying pathology. This reactive approach, a key concern for GPs and LPs accountable for financial health, ignores the fundamental underlying challenge: what is not measured cannot be seen, managed, or fixed. Leading to investment underperformance.

This is akin to ignoring where customers (Johnson, S. Who Moved My Cheese?) are moving, only to be surprised when revenue streams dry up. Furthermore, actions taken without understanding the full, system-wide consequences, as Hazlitt's economic principles cautioned, can inadvertently cause greater harm across the organisation, and be much more challenging to recover from.

This white paper introduces the SØRENSEN Organisational CT Scan for private equity value creation, a paradigm shift towards a rigorous, diagnostic mindset. Moving beyond conventional analysis and playbooks, this approach acts like a financial and operational diagnostic, explicitly designed to penetrate the surface pre-acquisition and throughout the holding period to maximise exit valuations. Each private equity SØRENSEN Asset Health Tracker™ report, for example, annually, shows positive, neutral and negative movement. Leveraging the proprietary SØRENSEN framework and model and the instinct of a ‘Strategic Bloodhound’ dedicated to uncovering value others miss, this methodology has, for a decade, meticulously diagnosed the root causes of inefficiency and customer disengagement with great success.

Crucially, it quantifies the direct financial impact of these hidden customer disconnects, revealing significant, untapped value often overlooked and missed by standard due diligence.

This proprietary diagnostic culminates in actionable insights and metrics, such as the SØRENSEN Asset Efficiency Score™ (AES), providing a clear baseline of organisational health relative to its true potential. To symbolise the true potential level attained, providing diagnostic rigour and maximised returns, this paper proposes the SØRENSEN Asset Efficiency Certification (AEC)™ as the trusted validation.

For GPs, achieving this SØRENSEN Asset Efficiency Certification (AEC) validates a commitment to operational excellence and data-driven value creation, enhancing differentiation and potentially aiding fundraising. For LPs, it serves as a vital signal of assurance during manager selection and co-investment, indicating that a GP possesses the tools and mindset to look beyond assumptions, address root causes, and unlock sustainable value, thereby increasing confidence in achieving superior, reliable multiples (IRR/si-IRR).

Adopting this pragmatic, diagnostic view moves PE beyond reactive firefighting or chasing potentially misaligned innovation trends. It empowers GPs and LPs with the foresight to mitigate catastrophic risks, build authentic organisational resilience, and unlock the substantial value hidden in plain sight. It is essential for navigating uncertainty, ensuring long-term portfolio health, and achieving sustainable success in an increasingly competitive landscape.

Consider the fundamental challenge in human assessment: can you reliably gauge genuine health merely by appearance? Age, physique, or outward vitality are not foolproof indicators; seemingly robust individuals can harbour hidden conditions like high blood pressure or inflammation unseen beneath the surface. Conversely, others might possess surprising underlying resilience despite a less imposing exterior.

This principle holds profound implications for private equity. Both target acquisitions and existing portfolio companies often present a compelling facade – impressive headquarters, positive press, strong top-line growth, or favourable EBITDA margins. These are the standard metrics reviewed during due diligence and reported to LPs. Yet, this polished surface can dangerously mask underlying pathologies: critical operational friction, eroding customer loyalty, defining the actual brand reality, misaligned internal processes, or cultural issues silently undermining long-term value.

For GPs building an investment thesis and LPs allocating capital, relying on these surface indicators is akin to judging health solely by appearance – a fundamentally flawed approach.

The core challenge in PE is differentiating sustainable value creation from temporary success or market tailwinds – separating skill from luck.

Assessing an asset's true health and potential demands a diagnostic approach that penetrates conventional analysis and moves beyond the misleading surface's superficial metrics. It requires understanding the often-unseen customer disconnects between a company's internal assumptions and the external reality experienced by its customers – the reality that ultimately dictates market position and financial performance.

An asset will only ever be as strong as the customer allows it to be.

This white paper introduces a powerful lens, drawing parallels with human homeostasis, to diagnose the underlying health of organisations within a PE context. Understanding these principles provides the foresight needed to identify risks and opportunities often missed by traditional due diligence, enabling proactive intervention before surface symptoms escalate into value-destroying crises.

The imperative is clear: leading research, including extensive studies by firms like McKinsey, confirms that organisational health is arguably the single strongest predictor of long-term value creation. The healthiest companies consistently deliver multiples of the shareholder returns generated by their less healthy peers – a differential of critical importance to both GPs seeking alpha and LPs evaluating manager performance.

However, diagnosing this underlying health accurately, quantifying its financial impact, and identifying the specific levers for improvement remains a critical challenge. Surfacing these 'unhealthy,' often unseen, markers – the hidden risks and unrealised potential – and translating them into actionable value creation strategies is the focus of the SØRENSEN Organisational CT Scan detailed herein.

Human homeostasis describes the body's ability to maintain a stable internal equilibrium – regulating temperature, blood sugar, and countless other variables to stay alive – despite extreme external changes. This ensures optimal function. However, a crucial insight lies here: this balance point, or 'baseline', isn't inherently optimal. An individual might maintain a stable but dangerously high blood sugar level; it is the equilibrium itself that is unhealthy, potentially leading to severe long-term consequences if left undiagnosed and unaddressed.

True health, therefore, often requires more than just maintaining the current balance; it necessitates proactively 'resetting' or 'recalibrating' the baseline to a more efficient, optimised level through conscious intervention. Furthermore, this optimal baseline is unique to each individual; generic, 'one size fits all' approaches inevitably fail to unlock the full potential of the vast majority. Birthing the 'griftocracy' mantra.

This analogy translates directly and powerfully to the assessment and management of portfolio companies in private equity. 'Organisational health' mirrors this dynamic internal balance, adaptability, and functional effectiveness, always viewed relative to the specific strategic goals and market context of the asset. For GPs and LPs, understanding this deeper health is critical for unlocking fuller value and requires assessing several interconnected factors:

• Balance: Is the portfolio company striking a sustainable equilibrium between competing demands crucial for PE success – short-term cash flow targets vs long-term strategic investments for exit value, rapid growth vs operational scalability, sales targets vs maintaining customer experience? Persistent imbalances often signal underlying stress or flawed strategic assumptions within the investment thesis.

• Interconnectedness: Recognising that functions within a portfolio company do not operate in silos is key. Dysfunction in one area – poor integration post-acquisition, weak financial controls, inconsistent sales processes, customer disconnect – inevitably impacts overall performance, valuation multiples, and ultimately, IRR.

• Adaptability: How effectively can the company sense and respond to market shifts, competitor actions, or technological disruption? This capacity is fundamental to resilience and achieving a successful exit in a dynamic market environment, even more so with the current global economic uncertainty.

• Contextual Health: Peak performance for a high-growth tech buyout target looks vastly different from that of a stable industrial carve-out. Performance and potential must be judged against relevant industry benchmarks, peer performance, and the specific objectives outlined in the GP's value creation plan.

• Internal Ecosystem ('Microbiome'): Organisational well-being relies on fostering beneficial elements – efficient workflows, positive cultural norms that drive performance, effective communication ('good bacteria') – while actively identifying and mitigating elements that create friction, drain resources, or hinder value creation ('bad bacteria,' e.g., legacy system inefficiencies, entrenched resistance to change). Ignoring this unique internal ecosystem is perilous.

The simple concept of scanning the potentially suboptimal baseline holds profound lessons for GPs and LPs. A portfolio company might appear stable, perhaps meeting quarterly covenants or hitting certain operational KPIs – effectively maintaining its 'organisational homeostasis'. However, like the individual with undiagnosed high blood sugar, this apparent stability could mask a fundamentally inefficient or damaging baseline.

That represents a significant hidden financial risk never revealed, but, more importantly for PE, it also shows substantial unrealised potential across any timeline. Relying only on surface metrics or failing to diagnose the need for recalibration means leaving significant value on the table.

True value creation in PE requires moving beyond surface-level stability. It demands robust diagnostics to assess whether the company's current equilibrium represents an optimal baseline capable of supporting peak efficiency, authentic resilience, and maximum growth performance – the foundations for superior returns.

Failure to diagnose and reset a suboptimal baseline is often where hidden costs accumulate, and predicted potential multiples are lost.

Consider the human body: seemingly isolated symptoms like persistent thirst, fatigue, or slow-healing wounds might be treated individually for years. Yet, collectively, they can signal a serious underlying condition like unregulated blood sugar, where significant damage occurs long before a proper diagnosis is sought or suggested. This reactive, symptom-focused approach is mirrored, often with financially devastating consequences, within private equity portfolio management.

Post-acquisition, under pressure to meet ambitious growth targets outlined in the Value Creation Plan, GPs and portfolio company management can easily fall into the trap of addressing visible problems with quick, superficial fixes. This symptom-based management is costly, ineffective, and fails to address the root causes hindering performance multiples:

1. Symptom: High Employee Turnover in a Key Division.

   • Common PE Fix: Increase pressure on remaining staff to cover workloads and implement stricter performance monitoring on existing teams, often under the mistaken assumption that high turnover stems from individual performance issues rather than systemic problems. This approach frequently fosters a toxic work environment which, while appearing to address immediate gaps, systemically introduces downstream inefficiencies, erodes morale further, and often exacerbates the turnover problem in the long run.

   • Potential Root Causes (Often Overlooked): Poor integration post-acquisition, lack of clear strategic direction from new ownership, misalignment of incentives, weak middle management, or a culture clash unresolved during due diligence – issues rarely solved by surface-level actions and frequently exacerbated when such superficial fixes are applied.

2. Symptom: Stagnating or Declining Sales Growth.

   • Common PE Fix: Push aggressive discounting (eroding margins), increase short-term marketing spend without clear ROI, or reshuffle sales leadership, often driven by the flawed assumption that the problem is purely one of sales effort or marketing visibility. This tactic can attract unprofitable customer segments, devalue the brand, mask deeper product or market fit issues, and ultimately delay addressing the strategic challenges that are truly suppressing growth.

   • Potential Root Causes (Often Overlooked): Fundamental misalignment between the product/service and evolving customer needs (the ‘cheese’ has moved), deteriorating customer experience damaging loyalty, ineffective sales processes ignored during DD, or channel conflict exacerbated by new strategic initiatives – critical issues that superficial sales pushes or marketing blitzes fail to address and may even obscure further.

3. Symptom: Consistent Budget Overruns or Missed Operational KPIs.

   • Common PE Fix: Implement stricter reporting demands, mandate more frequent update meetings (increasing overhead), or enforce across-the-board cost cuts, typically based on the erroneous belief that the core issue is a lack of discipline or insufficient oversight rather than fundamental planning or resource inadequacies. While creating an appearance of tighter control, this often increases bureaucracy, demoralises teams with unrealistic demands, harms productive areas through indiscriminate cuts, and fails to resolve the underlying operational bottlenecks or strategic miscalculations.

   • Potential Root Causes (Often Overlooked): Unrealistic initial planning in the VCP, hidden operational bottlenecks, inadequate resources allocated (staff, budget, technology), poor cross-functional collaboration, or skill gaps within the team needed to execute the PE strategy – fundamental flaws that stricter reporting or broad cost-cutting cannot resolve and might worsen by damaging necessary functions or obscuring true capacity constraints.

Merely treating these symptoms offers no lasting solution for enhancing enterprise value. It wastes critical resources (time, capital, management focus) and ignores the underlying imbalances or inefficiencies that are truly constraining growth and profitability—customer disconnect.

This reactive mode prevents GPs and management from understanding the real drivers of underperformance. Worse, blunt interventions can inadvertently harm the 'good bacteria' – efficient teams, pockets of innovation, or positive cultural elements essential for long-term health and achieving a successful exit. This focus on the superficial over the substantial is a hallmark of the 'griftocracy' approach – activity mistaken for progress.

Failing to diagnose and address the root cause doesn't just delay achieving the investment thesis; it allows underlying problems to fester and deepen. This leads to compounded risks, drains further resources, fosters cynicism within the portfolio company, and ultimately jeopardises the targeted returns and exit multiples, potentially leading to significant write-downs for LPs.

How can private equity move beyond the perils of symptom-based management (Section 3) to accurately diagnose portfolio health and unlock maximum value? Standard due diligence, while necessary, often resembles assessing cardiac risk based merely on appearance or basic blood work – it frequently misses the deeper, critical unseen indicators.

Just as a Coronary CT calcium scan reveals hidden plaque buildup, providing a powerful predictor of future risk and enabling preventative action, PE requires a comparable diagnostic tool for its assets. The SØRENSEN Organisational CT Scan is essential for truly informed investment and management decisions.

Its purpose extends beyond flagging immediate deviations or benchmarking against generic frameworks. While valuable tools like McKinsey's OHI assess management practices, the SØRENSEN Organisational CT Scan described here serves a distinct, critical missing function for PE: to pinpoint and, crucially, quantify the direct financial impact of hidden operational friction, customer disconnects and other unseen issues.

It is designed to calculate the precise cost of this unseen, unfelt friction, including the often substantial unrealised revenue potential that is at state, the primary target for PE value creation.

It answers the vital question: Is this asset operating at its true higher potential, or is it stuck in a suboptimal baseline equilibrium requiring a fundamental reset? It answers the Who, What, When, Where, and Why.

The SØRENSEN framework and model: The PE Diagnostic Engine

The proprietary SØRENSEN framework and model function as this pragmatic, stress-tested SØRENSEN Organisational CT Scan. Developed, tested and refined over a decade, driven by the ‘Strategic Bloodhound’ instinct and curiosity to uncover value others miss, this approach moves beyond traditional financial reporting, management surveys, or standard consulting analyses. It meticulously dissects customer behaviour (‘customer reality’), competitor strategies, broader market trends and dynamics, operational efficiency, and the crucial link between customer disconnects and financial performance, quantifying the impact of these factors.

The predictive accuracy and reliability of the underlying SØRENSEN framework and model in identifying critical unseen issues and unrealised potential are underscored by an incredibly robust F1-score of 0.92. The F1-score, a statistical measure balancing precision and recall, indicates a high degree of effectiveness in the diagnostic process.

It is specifically designed to reveal critical insights often missed during the intense, time-constrained standard M&A due diligence process, illuminating unseen risks and quantifying significant growth opportunities that directly inform the investment thesis and Value Creation Plan.

Quantifying Potential: The SØRENSEN Private Equity Asset Efficiency Score (AES)

The framework and model calculates the SØRENSEN Asset Efficiency Score (AES) – a clear, actionable metric reflecting any asset's health and its effectiveness in converting internal actions into generating customer revenue effortlessly. It synthesises weighted KPIs critical for PE assessment:

• Customer Experience & Reality: Measures true customer satisfaction and perception across all touchpoints, directly linking sentiment to value erosion or creation potential.

• Operational Excellence: Evaluates efficiency across key value chain components (e.g., retail, supply chain, logistics), identifying sources of hidden costs and friction impacting margins and scalability.

• Brand & Market Alignment: Assesses brand strength, consistency, and resonance with target customers relative to competitors.

• Financial Rigour: Integrates key financial metrics within the context of the deeper operational and customer insights.

The private equity’s resulting SØRENSEN Asset Efficiency Score (AES) isn't just a benchmark; it's a powerful diagnostic indicator. It directly correlates underlying issues – particularly customer disconnects and operational friction – with tangible, quantifiable financial impact, specifically the unrealised revenue potential trapped within the organisation. This provides GPs with precise, data-driven targets and rolling updates for intervention within their VCP.

The SØRENSEN Asset Efficiency Certification (AEC)™: Validation for Rigour and Returns

To validate this, because brands aren't built by companies, they're built in customers' minds. It's their perception, gut feeling, and emotions. Each experience creates a unique one of millions of slightly different brands in the minds of its customer. This paper proposes the SØRENSEN Asset Efficiency Certification™ (AEC) as a trusted validation in the PE landscape. It serves to confirm (through reporting) for LPs a deep diagnostic rigour and signal from GPs a strong commitment to value creation.

What it signifies

The SØRENSEN Asset Efficiency Certification (AEC) certifies that an asset or group of assets (pre-acquisition or during ownership), or a GP's process, has undergone a comprehensive SØRENSEN Organisational CT Scan and has been issued with a SØRENSEN Asset Efficiency Score (AES) rating. This rating aims for a level of independent rigour and transparent insight conceptually similar to assessments from firms like Moody's, Standard & Poor's, and Fitch, highlighting investment risks.

The AEC validates that this rating is an independent and transparent assessment that goes beyond surface metrics to understand true operational health, customer reality, quantified risks, and unrealised potential based on the proprietary SØRENSEN framework and model.

1. Value Proposition for GPs:

   • Enhanced Due Diligence: Provides deeper insights for more accurate valuation and robust investment thesis.

   • Actionable VCP: Delivers specific, quantified levers for the Value Creation Plan.

   • Fundraising & Differentiation: Demonstrates a superior, transparent, and data-driven approach to potential LPs.

   • Stakeholder Confidence: Builds trust with management teams and lenders through a clear, evidence-based assessment.

2. Value Proposition for LPs:

   • Informed Manager Selection: Offers a tangible signal of a GP's operational sophistication and commitment to rigorous diligence beyond the track record (skill vs. luck).

   • Increased Transparency: Provides assurance that capital allocation decisions are grounded in deep, quantified insights into the asset's potential and risks.

   • Confidence in Returns: Links the diagnostic rigour directly to the potential for achieving higher, more reliable multiples (IRR/si-IRR) by addressing root causes and unlocking hidden value.

   • Reduced Risk: Mitigates the risk of investing based on incomplete information or overly optimistic projections.

The SØRENSEN Asset Efficiency Certification (AEC) aims to become a global standard for best practice, transparent PE investing, signifying a move away from assumptions and towards quantifiable, customer-centric value creation. Its goal is to provide the necessary assurance missing for navigating complexity and unlocking superior, sustainable returns.

Ultimately, it aims to break through the operational 'haze,' remove barriers to understanding, reporting and foster greater transparency between PEs and LPs, doing so in a non-threatening manner as the insights generated are designed to enhance gains for both GPs and LPs.