During The Holding Period: Turning Risk Into Protected Value

PE returns are built into value‑creation plans, but they are often eroded through governance, operational, and regulatory shocks. These shocks can appear quickly, disrupt operations, and force exit repricing. In leveraged deals, they hit equity disproportionately.

Why value erodes during the holding period

After closing, value is not only lost because the upside case was too ambitious, but because downside events in the holding period erode cash flow and exit options. Unmanaged risks drive unexpected EBITDA drops, remediation CapEx and ongoing OpEx, tighter covenants, and longer holding periods. The outcome shifts from base case toward the downside scenario, even though the original equity story has not changed.

This paper focuses on three risk vectors that repeatedly translate into value erosion:

1. Supply-chain compliance and human rights
2. Incident response capability
3. Data and AI use

These risk vectors show up in real deals with measurable financial consequences. They can break assumptions on pricing, volumes, market access, and, ultimately, the base case.

Supply-chain compliance and human rights enforcement

Regulators are moving beyond tier‑1 suppliers (e.g., see recent enforcement actions in the luxury goods industry in Italy ¹). This is no longer an abstract ESG discussion; it is an exposure that can directly affect where a company can be sold and to whom.

With the EU Corporate Sustainability Due Diligence Directive (CSDDD), regulators are also moving towards mandatory, risk-based human-rights and environmental due diligence across the value chain, further increasing scrutiny on high-risk supply chains.

Key regulatory expectations include,

• Identifying and addressing forced labor and labor exploitation
• Preventing environmental harm in the upstream chain
• Putting in place workable audit and risk‑monitoring systems, not just policies on paper

For a portfolio company, the consequences can include import bans, shipment seizures, civil and criminal liability, and reputational damage - with the following impacts on PE firms:

• Revenue risk where key customers or routes depend on ‘clean’ supply chains
• One‑off and recurring costs for remediation, re‑sourcing, and traceability systems
• A need for a more demanding equity story when buyers and their lenders ask detailed questions

In a sale process, unresolved supply‑chain issues increasingly show up as red flags. Buyers ask for extra confirmatory due diligence, specific conditions precedent, broader warranties, or discounts. Funds that map supply‑chain exposure early, focus on the highest‑risk chains, and close gaps well before an exit are in a better position to defend their base case and attract a broader buyer universe.

Incident response capability

Every portfolio carries the potential for bad news: accounting issues, corruption, management misconduct, data breaches. Whether this destroys value depends far less on the incident itself than on how the company responds.

From a PE firm standpoint, three key questions matter:

• Does the board have clear, regular oversight of investigations and integrity topics (for example via a dedicated committee or fixed agenda item)?
• Are reporting lines and escalation paths defined so that serious allegations reach the right people quickly, rather than travelling informally through the organization?
• Are there simple and agreed playbooks for investigations, communication, and regulator interaction? Have management and the board actually tested them in practice at least once?

Without these basics, responses are slow and uncoordinated. Regulators, customers, lenders, and buyers lose confidence. Auction processes drag, valuation expectations reset, and, in some cases, refinancing becomes more difficult. Strong governance, clear reporting lines, and tested playbooks can confine a problem to a limited time window and a coherent story.

In deal terms, poor incident response can,

• Delay or derail sale processes
• Reduce the number of bidders and make them more cautious
• Force renegotiation of price, structure, or risk allocation

Vendor due diligence is critical here. A clear, well‑documented fact base, evidence of board‑level governance, and a credible remediation track record can rebuild buyer confidence and keep control over the narrative. Without that preparation, doubts remain in the room. These show up directly in bidder interest, process design, and pricing.

The difference between a controlled, credible response and a drawn‑out crisis can easily amount to several points of multiples on invested capital (MOIC). This is why more sponsors now insist on practical incident‑response playbooks in the first year of the holding period, with explicit ownership and regular testing built into governance.

Data and AI risk management

Many portfolio companies are rolling out data and AI tools faster than governance and controls can keep up. That creates a new class of hold‑period risk: sensitive data landing in unmanaged tools, models making decisions that are hard to explain, and evolving rules that may impose obligations, which no one priced in at entry.

In Europe, regimes such as the EU AI Act, the Data Act, the Digital Operational Resilience Act (DORA) and the Directive on Security of Network and Information Systems (NIS2 Directive) are raising the bar on how data, critical systems and AI-supported decisions are governed, increasing the risk that legacy portfolios fall out of compliance during the holding period.

We increasingly see these patterns:

• ‘Shadow AI‘ tools used by teams without central oversight, often fed with customer, employee, or pricing data
• Model outputs are embedded in core processes (e.g., credit, pricing, marketing) without clear accountability or documentation
• No reliable inventory of which AI systems are in use, which data they touch, or their classification under emerging regulation

For PE firms, this risk is not abstract. Unmanaged data and AI use can trigger data‑protection or sector‑regulatory investigations after an incident, extending hold periods or complicating exits, and require unplanned remediation projects (e.g., data clean‑up, model documentation, new governance layers) that absorb CapEx and management time. Buyers become nervous if they cannot get a clear view of what systems exist, what data they use, and how they are governed.

A holding‑period playbook for value protection

Value creation gets the attention. Value protection keeps the economics intact.

For top‑tier PE firms, integrating supply‑chain compliance, incident‑response readiness, and data and AI risk into the holding‑period agenda is becoming standard practice. This is what that often means in practical terms:

• Make exposure visible. Build a concise view of operational, supply‑chain, and data/AI risks across the portfolio, with a clear sense of which ones can realistically hit cash flow, covenants, or exit options.
• Fix obvious weaknesses early. Prioritize remediation that directly protects EBITDA and deal certainty, for example, addressing known supply‑chain red flags, closing governance gaps around investigations, or putting basic guardrails and ownership around critical data and AI use.
• Anchor value protection in reviews and exits. Treat these topics as part of the equity story, portfolio reviews, investment committee (IC) materials, and exit preparation, not as a separate compliance track that runs in parallel.

Funds that work this way rely less on the hope that ‘nothing happens’ during the holding period, and more on being ready for the issues that could occur. Those that do not are more likely to see base‑case assumptions tested late in the hold. And this is precisely when the flexibility to correct course is most limited.

We work with PE firms and their portfolio companies to build practical value-protection frameworks tailored to their specific holding-period risks.

Footnote

1. See exemplary Parodi, Emilio (2025), Italian police visit fashion firms including Gucci and Prada in labour abuse probe, in: Reuters, https://www.reuters.com/business/italian-police-seek-governance-documents-13-fashion-firms-labour-abuse-probe-2025-12-04/ (access date: February 27, 2026).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.