Multiples compression gets discussed almost entirely as a pricing phenomenon, what a business is worth on entry and exit, and that’s obviously the headline effect. What gets discussed far less is how compression changes behaviour inside portfolio companies during the hold itself, often in ways that quietly undermine the value creation plan. 

The most consistent effect is a shift in what “good performance” looks like from the management team’s perspective. In a rising-multiple environment, growth at almost any cost tends to get rewarded, because the market will pay for growth even if margins are thin. In a compressed-multiple environment, the same growth-at-any-cost approach gets punished at exit, because buyers are far more focused on efficiency and durability of margin. 

Management teams that were hired and incentivised during a different multiple environment don’t automatically recalibrate their instincts just because the market has shifted, and a genuine gap can open up between what the management team is optimising for day to day and what will actually be rewarded at exit. 

The second effect, less obvious but just as real, is on risk appetite around add-on acquisitions and expansion bets. In a compressed environment, the same bolt-on strategy that made sense when multiples were rising and integration risk was more easily absorbed by a rising market can look considerably riskier, because there’s less multiple expansion available to paper over integration missteps. 

The practical implication for anyone operating in the current environment: revisit the management team’s incentive structure and explicitly check whether it’s still pointing at growth-at-any-cost or has been recalibrated toward efficient, durable growth that will actually be rewarded by buyers in this specific market. An incentive structure built for a different multiple environment quietly working against the current plan is a more common problem than most boards realise.