The Streetlight Effect in Value Creation

Alex Kaminsky, June 2026

 In 2024, Morgan Stanley published a study on value creation in middle-market private equity. Its central thesis is precise: in an environment of higher cost of capital, reduced leverage, and a more challenging exit market, hands-on operational value creation has become not an option but a necessity. If anything, the topic has only become more relevant since.

 
The study provides a detailed account of the modern operational playbook - pricing, commercial excellence, procurement optimisation, M&A integration, talent management - and makes a compelling case for why operational improvement has become the primary source of alpha. The authors also make an important observation: when the same set of tools is used by virtually all market participants, it becomes a condition of entry rather than a competitive advantage.
Both the diagnosis and the proposed solution are entirely logical. If creating value is becoming harder, the answer is to manage the business better. But there is one aspect of this picture that deserves closer attention.
 
Two Risk Systems

An operational playbook is not simply a collection of best management practices. At its core, it is a system for identifying and managing the risks that may affect value creation for the beneficiary. This is precisely why it helps improve decision quality, reduce uncertainty, and increase the likelihood of achieving the desired outcome.
And this raises a question worth examining.
If value creation is inseparable from risk management, are all the risks that influence the final outcome actually present in this model?
Virtually the entire language of modern value creation is built around the beneficiary's risks. Governance structures, KPIs, decision-making processes, and operational playbooks are all organised around them. But value is not created by capital alone - it is also created by people.
 
Which means that in any transaction, project, or transformation programme, at least two risk systems operate simultaneously. The first is the beneficiary's risk - the domain that operational playbooks are designed to address. The second is the personal, professional, reputational, and other risks of the people who make decisions and drive change every day.
 
As an investor or business owner, you may rarely think about this second category of risk. That is understandable: it is largely absent from conventional value creation models. Yet it is precisely these risks that shape an enormous number of decisions made inside any project.
Is it worth proposing an unconventional solution? Is it worth taking personal accountability? Is it worth stepping outside a formal role? Is it worth challenging a more powerful participant? Is it worth investing one's own political capital in an initiative whose success cannot be guaranteed?
Each of these decisions is rational from the perspective of the individual making it. But their cumulative effect directly influences the value the beneficiary ultimately receives.
 
Where Value Disappears

The influence of participants' personal risk profiles has always existed. What is changing is their relative weight in the overall risk/return equation - that is, their economic significance. As the margin for error narrows and the EBITDA gap compresses, the effect of these risks becomes increasingly visible: in the quality of decisions, in the speed of cross-team interaction, and in an organisation's capacity to execute genuinely valuable change.
The rational behaviour of individual participants can gradually shift a project toward safer, but not necessarily most valuable, outcomes for the beneficiary. This, in my view, is one of the underappreciated blind spots in modern value creation.
Morgan Stanley rightly points out that a significant share of value emerges in couplings - the points of interaction between functions, teams, and business units. These situations are typically attributed to insufficient coordination. But the underlying cause may run deeper.
At each of these points, it is not only different functions that meet - it is different risk configurations. Each participant evaluates the situation not only through the lens of business interest but also through the lens of personal vulnerability. This is why couplings are not merely organisational interaction points. They are places where different decision-making models intersect - and where a significant share of value can either emerge or disappear.
 
The Corridor of Permissible Decisions

Risk management frameworks, governance structures, and operational playbooks filter out decisions that fall outside an acceptable risk threshold for the beneficiary. But even after that filtering, a certain corridor of permissible decisions typically remains.
 
It is within this corridor that the effect described above begins to manifest. When several options are equally consistent with business interests (according to playbook standards), but one demands greater personal accountability, creates additional reputational exposure, or increases the probability of personal loss in the event of failure - while another delivers an acceptable outcome at lower personal risk - the choice frequently shifts toward the second.
From a corporate governance perspective, such a decision is entirely correct. For the beneficiary, however, it may mean choosing not the best achievable outcome, but merely a sufficient one.
 
Afterword

There is a well-known story about a man searching for his lost keys under a streetlight - not because he dropped them there, but because the light is better. Operational playbooks work in a somewhat similar way. They illuminate precisely the factors they were designed to manage. But that does not mean all economically significant sources of value creation will be found there.
Every economically significant category of risk eventually acquires its own management function. Financial risks are handled by finance. Legal risks by legal. Operational risks by operational management. If the personal risk configurations of team participants genuinely influence value creation, the logical next step is the emergence of a dedicated function - one whose purpose is to manage the situations in which those risks begin to affect the value delivered to the beneficiary.
 
Taking all of the above together, for a beneficiary focused on maximising value creation, introducing such a function may prove to be one of the most profitable management investments available - precisely because it operates where existing tools, by definition, do not.
 
Source: Morgan Stanley Investment Management, "Hands-On Operational Improvement Key to Creating Alpha in the Middle Market", October 2024
https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/private-equity-alpha-middle-market.html