What is a typical outcome of a "multiple contraction" in private equity?

A typical outcome of a "multiple contraction" in private equity occurs when the valuation multiple placed on a portfolio company decreases from the time of purchase to the time of exit. This often results from various factors, such as market conditions becoming less favorable, increased competition, or changes in industry dynamics. When this contraction happens, it means that the firm is likely to sell the investment at a lower multiple than what was initially paid, which can negatively impact returns.

Understanding that multiple contractions typically occur in tougher economic climates can help illustrate why option A is the correct choice. The other options imply scenarios regarding performance improvements and favorable exits, which are contrary to the concept of multiple contraction. Therefore, recognizing the implications of a decreased multiple clarifies why exiting at a lower multiple than the purchase multiple signifies this concept accurately.