Best of LinkedIn: Private Equity Insights CW 22/ 23

00:00:00: Provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about private equity in CW-twenty two and twenty three.

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00:00:27: So Imagine sitting on three point seven trillion dollars in cash, but feeling absolutely paralyzed to spend it.

00:00:34: Yeah It's a wild position to be right.

00:00:36: I mean the traditional private equity playbook The one that was built on cheap debt clean multiples and you know those predictable five-year exits is just completely broken Right now.

00:00:45: welcome to this deep dive.

00:00:46: today We're cutting through the noise To bring you the reality of what's actually happening On the ground in PE based on the sharpest insights dominating LinkedIn over the last two weeks.

00:00:54: It really is a totally different landscape out there.

00:00:57: The core thesis of how private equity actually generates returns, well it's being rewritten in real time and honestly a lot of funds are just struggling to adapt the new math.

00:01:08: Let's get right into that math because I mean, it's staggering.

00:01:15: Kevin Harper recently highlighted a note from the EY Private Equity Pulse Report pointing out that three point seven trillion in dry powder is just sitting idle.

00:01:23: Trillion

00:01:24: with a T

00:01:25: trillion capital is literally everywhere.

00:01:27: But uh if you look at The Takeaway as Hugh MacArthur shared for the Bain Midyear report He points out the critical missing ingredient It isn't capital its confidence

00:01:37: Yeah, and that deficit of confidence is having this really profound cascading effect mostly by completely reshaping the timeline of ownership.

00:01:45: Aditya Padia shared some McKinsey data That should give like every operator pause.

00:01:50: What's a number?

00:01:50: Well The average private equity hold period has now stretched out to over six-and-a-half years.

00:01:54: Wow!

00:01:55: Over six and half.

00:01:56: Yeah, roughly half of all buyout backed companies have been sitting in portfolios for four years or longer right now.

00:02:02: You know

00:02:02: stop and think about what that means if you were an operator inside one of those companies.

00:02:06: the entire psychological contract of a PE deal it's um It's built around a five-year sprint exact.

00:02:14: If you're holding a company for almost seven years You can't just ride out a favorable macro cycle?

00:02:19: You actually have to run and improve the business And this executing gap is becoming glaringly obvious.

00:02:26: Wayne Marhelsky was analyzing some recent KPMG data that showed deal volume, exit volume and fundraising all hitting multi-year lows at the exact same time.

00:02:37: Yeah!

00:02:37: And it's incredibly easy to just blame high interest rates for those simultaneous lows right?

00:02:41: Like...that is an easy scapegoat?

00:02:43: Oh For sure.

00:02:43: But Wayne's analysis points a much deeper systemic issue.

00:02:47: The real constraint on returns isn't just closed IPO window.

00:02:51: No It's operational reality.

00:02:53: His conclusion actually chilling.

00:02:56: The real distance isn't between today and the exit window.

00:02:59: It's between what the deal team modeled in their underwriting at entry, And where a portfolio organization can actually execute in reality.

00:03:06: Yes!

00:03:07: The execution gap.

00:03:08: Right it is like an NFL Team Where the front office drafted this legendary complex playbook But the roster on field physically cannot run the plays fast enough to beat the clock

00:03:18: Which perfectly explains the mathematical shift that Hugh MacArthur called out In That Bane Report.

00:03:24: He used the phrase, uh, twelve is a new five.

00:03:27: Wait!

00:03:27: Twelve Is The New Five?

00:03:28: Yeah

00:03:29: think about it...a decade ago A PE fund could buy an asset and if they just managed to grind out like a five percent e-bit day growth ...the cheap leverage And natural upward drift of market multiples would carry them To their target return.

00:03:43: Right

00:03:43: financial engineering basically did all that heavy lifting.

00:03:46: Exactly.

00:03:46: but today That same deal needs twelve percent organic growth to hit the exact same return profile because debt is expensive and multiples have totally flatlined.

00:03:55: Man, so if the only way to get your money out of a six-and-a-half year hold Is to suddenly produce twelve percent?

00:04:01: Organic Growth then financial engineering is officially dead.

00:04:05: I mean operational alpha is the only Way Out Of The Trap.

00:04:08: it's the Only Lover Left you Have To Fundamentally Build A Better Business.

00:04:13: But that Transition from Spreadsheet Math to Operational Reality is brutal, especially in buying Bill's strategies.

00:04:21: Mark Jansen wrote a brilliant post dissecting

00:04:23: this.

00:04:23: Oh yeah the Lego analogy Yes

00:04:25: because an investment committee meeting A roll-up strategy looks like a clean set of Legos.

00:04:30: You know you buy a platform company and snap on three smaller addon acquisitions Cut some redundant back office costs.

00:04:37: Boom, you arbitrage the multiple.

00:04:38: Right but problem is that the ICC's clean Legos while actual CFO gets handed a box of mismatched pieces glued together with different adhesives?

00:04:47: I love this analogy so much because it gives to the actual mechanism for friction.

00:04:51: Janssen calls integration phase a literal knife fight.

00:04:57: We aren't talking about just migrating everybody to a single Microsoft Outlook tenant.

00:05:08: It's uncovering hidden liabilities buried in messy inventory records.

00:05:13: Its trying to harmonize warring sales commission structures where changing the comp plan might cause your top three revenue generators, just walk out of door.

00:05:23: and that operational friction is literally destroying leadership teams tasks with managing it.

00:05:28: This brings us to a massive disconnect in how PE firms handle talent.

00:05:32: Right, the Alex Partners data?

00:05:33: Yeah Maxwell Salazar shared some startling data from them.

00:05:37: right now ninety one percent of private equity firms except CXO turnover as just A normal expected part of The holding period.

00:05:43: wait ninety-one percent.

00:05:44: that implies they basically expect the leadership To fail from day One.

00:05:48: it does.

00:05:49: yet paradoxically eighty three percent Of those exact same firms rate their own ability to select leaders As good.

00:05:55: the cognitive distance is staggering.

00:05:57: It's insane.

00:05:58: Nearly half of all CEO exits are happening between year one and year two.

00:06:03: And here's the kicker, ninety-two percent Of those unplanned departures Are driven by The PE firm itself.

00:06:09: So they're systematically firing the leaders They handpicked

00:06:12: Often without any succession plan in place.

00:06:14: so why is that Happening?

00:06:15: Why are supposedly brilliant investors making such chaotic firing decisions?

00:06:20: it has to go back To the twelfth the new five math.

00:06:22: Right.

00:06:23: Because if the deal team overpaid at entry, because they assumed that it could hit twelve percent growth and CEO misses an impossible year one target because they are bogged down in the CFO's ERP knife fight...

00:06:36: The board panics!

00:06:37: They fire the CEO rather than admit the Entry Multiple was fundamentally flawed.

00:06:41: Precisely…the

00:06:42: underwriting model sets an impossible trap and operator pays price.

00:06:45: but Chad Spencer pointed out doesn't have to be this chaotic.

00:06:48: What did he suggest?

00:06:49: He shared data showing that when funds actually implement structured, rigorous CFO search processes upfront like really aligning on the operational mandate rather than just hiring a resume.

00:06:59: They're time to fill drops dramatically makes sense and first year retention rockets from fifty percent to ninety percent.

00:07:05: The talent pool out there didn't change right?

00:07:08: The discipline of the search process did

00:07:10: And that discipline has to translate all the way to the exit.

00:07:13: There's a fascinating consensus forming around this exit friction.

00:07:18: You look at what Grigana Ivanova and Bjorn Torfos are discussing, alongside Constancy Nardi.

00:07:23: And they all point back to this new EYPE exit readiness study.

00:07:28: Oh yeah the EBIT capture problem

00:07:30: Exactly The standout finding is that fifty-five percent of respondents say the absolute hardest part of an exit today Is capturing your value creation initiatives in the exit EBITDA.

00:07:39: Because

00:07:40: buyers are no longer just taking your word for it, you can't do hard operational work and expect a premium multiple right?

00:07:47: You need diligence ready forensic financial evidence that explicitly links the operational blood sweat and tears to actual recurring EBITTA number.

00:07:55: if you cant prove this data room The buyer won't pay for it.

00:07:58: So If proving that elusive twelve percent ebitda growth is ultimate goal and operations of only way get there then every single firm is staring at exact same lever now

00:08:07: Artificial intelligence, artificial

00:08:09: intelligence.

00:08:09: But there's a massive widening divide in how AI is actually being weaponized in private markets.

00:08:16: Oh

00:08:17: absolutely!

00:08:17: Stephen Glade posted an absolute bombshell about open AI.

00:08:21: that completely shifts how we need to think about tech integration.

00:08:25: OpenAI recently closed a ten billion dollar deployment company vehicle, and they guaranteed the mega private equity firms backing it.

00:08:32: We're talking about firms like TPG.

00:08:34: in being capital at seventeen point five percent annual return.

00:08:38: that structure is unprecedented.

00:08:40: Why would a frontier tech company offer a sophisticated financial firm guaranteed yield like that?

00:08:46: Right.

00:08:46: Because OpenAI wasn't buying capital, they were buying wholesale distribution.

00:08:50: Let me push you on that.

00:08:51: so your telling me.

00:08:51: top tier mega funds essentially handed over their entire portfolios of companies as a captive testing ground.

00:08:58: What's the catch for the portfolio company?

00:09:00: The catches up they become the frontier.

00:09:02: OpenAI is embedding its own engineers directly inside these portfolio companies, almost Palantir style to build custom enterprise grade AI solutions.

00:09:11: Yeah the PE firm gets an unimaginable operational advantage and open AI get a massive locked in B-to-B customer base.

00:09:19: But

00:09:20: if the mega funds have open AI engineers literally hardwired into their manufacturing floors and service centers what happens to the midmarket firms?

00:09:30: Are they just gonna be completely left behind?

00:09:32: You can actually see the sorting effect happening in real time.

00:09:35: Stuart Wilson had a fascinating conversation with Doyle Burkett from Integrity Growth Partners recently, and Edwin Yun has been tracking this exact dynamic as well.

00:09:43: And what's the consensus?

00:09:45: The consensus is clear.

00:09:46: AI isn't going to break private equity evenly, it's going to sort into winners and losers very quickly.

00:09:51: The mid market is actively falling behind.

00:09:54: GPs have to start using AI internally to source and diligence deals just as aggressively as the tech companies they invest in or there are going to face brutal consequences from LPs at their next fundraise.

00:10:06: It's one thing to say deploy AI but if you're an operator staring at a confusing tech stack How do you actually allocate capital to this without burning millions on failed experiments?

00:10:16: It's tough.

00:10:17: it is but Anil Kumar laid out a phenomenal pragmatic playbook on how to structure AI capital during a hold period.

00:10:25: He breaks it down into three distinct horizons,

00:10:28: It's a great framework because it grounds the hype in actual cash flow

00:10:31: right?

00:10:32: So horizon one is month zero to twelve.

00:10:34: Yeah this is purely about self-funding cost takeout.

00:10:38: you deploy AI and high volume low complexity areas like back office invoice processing or level One customer service.

00:10:45: just

00:10:45: grab the low hanging fruit exactly.

00:10:48: The goal isn't to revolutionize.

00:10:50: generate internal cash flow quickly so you can fund the heavier lifts later.

00:10:54: Then, you hit Horizon Two which is months six to thirty.

00:10:58: this where you move from efficiency to effectiveness isn't just bolting a chatbot onto a website.

00:11:03: This fundamental workflow rearchitecture right?

00:11:06: You were redesigning how the company quotes How it prices and delivers its core service.

00:11:11: that builds massive switching costs for your customers real operating leverage.

00:11:15: And finally, Horizon Three runs parallel from day one all the way to exit.

00:11:19: This is a strategic accumulation of proprietary data and intellectual property.

00:11:23: The IP mode?

00:11:25: Yes!

00:11:33: quote unquote use AI, you're pitching a company with proprietary models trained on exclusive data that your competitors physically cannot replicate.

00:11:43: But let's inject a serious reality check here.

00:11:45: before You can build the Death Star?

00:11:47: You have to make sure Your plumbing actually works

00:11:49: one hundred percent.

00:11:50: Paul Press made A really sobering point about this.

00:11:52: You Cannot run an advanced AI agenda On infrastructure That is held together With Excel spreadsheets duct tape and tribal knowledge.

00:12:00: Yeah, you just can't!

00:12:02: Most portfolio companies frankly don't need a visionary AI prompt engineer right now.

00:12:06: they need a foundational tech operator to fix their broken ERP systems first.

00:12:11: And the stakes for getting that foundation right are moving from operational risk To deal killing compliance risk.

00:12:17: How so?

00:12:17: Well Tanner Arnold has pointed out That in advanced regulatory markets like The Netherlands Ai enablement is no longer Just A cool sandbox experiment.

00:12:25: It Is a formal compliance heavy value creation thesis.

00:12:29: Yeah, buyers are subjecting target companies to intense AI due diligence.

00:12:33: If your data infrastructure isn't robust or if you have privacy leaks and how your models are trained, buyers won't just lower the multiple they will simply walk away.

00:12:42: Okay

00:12:42: so let's tie this all together.

00:12:43: Let's say you've done The Impossible.

00:12:45: You survived the grueling six-and-a-half year hold period... ...you fought the CFO knife fight with legacy systems.

00:12:53: You successfully deployed Anil Kumar's Three Horizons of AI and built a real moat.

00:12:59: The business is great!

00:13:00: Now, how do you actually get your money back for your LPs in a market where traditional exits are completely frozen?

00:13:08: This is where the structural architecture of the industry has just shifting beneath our feet.

00:13:12: Secondaries have moved from being a niche, almost distressed strategy to becoming the absolute core liquidity engine of private markets.

00:13:20: Right.

00:13:20: Nickel Edmire highlighted that Ardian just closed a massive thirty billion dollar secondary fund.

00:13:26: Let That Sink In.

00:13:26: Thirty billion?

00:13:27: Yeah!

00:13:28: That's secondary funds larger than any traditional private equity buyout fundraised.

00:13:32: today

00:13:32: Capital is flowing entirely to where liquidity is needed most.

00:13:36: And Kim Watson pointed out this isn't just happening in traditional equity either, European private credit secondaries represent a massive first mover opportunity right now because they're lagging significantly behind North America's infrastructure.

00:13:48: Exactly and that desperate need for liquidity is driving the explosion of continuation vehicles or CVs.

00:13:57: Neha Cabra shared a statistic showing that CVs have jumped from roughly five percent of all private equity exits in twenty-twenty to nearly Twenty percent today.

00:14:05: Okay, let me aggressively challenge this whole continuation vehicle trend.

00:14:09: do it because if you read between the lines LPs are highly suspicious mm-hmm our GP is actually using these vehicles To extend the value creation phase of a truly spectacular asset That just needs more time.

00:14:21: or our GPs Just Using CV's to buy Time hide the dead bodies and avoid taking a massive haircut on companies that completely failed to hit that twelve percent growth target.

00:14:31: Look, it is the most critical contentious question in the industry right now.

00:14:35: honestly yes some GPs absolutely are using them to hide dead bodies into lay the inevitable markdowns.

00:14:41: but LPs aren't blinded to that dynamic.

00:14:44: they're demanding heavy discounts and punishing terms for assets.

00:14:47: look like duds.

00:14:48: however The broader macro trend isn't just a shell game.

00:14:52: Hosna Hubani provided a really profound insight on this.

00:14:55: What's her take?

00:14:56: She notes that European private markets, aided by regulatory shifts like Altif two point oh are undergoing a fundamental design shift.

00:15:04: for decades Private Markets were built for capital formation bringing money in.

00:15:08: yeah today they're transitioning to an infrastructure built-for-capital circulation.

00:15:13: Liquidity isn't just the end goal anymore.

00:15:15: It's an ongoing systemic requirement,

00:15:18: which completely changes The required skill set for the deal teams managing these assets.

00:15:23: John L had a great post observing that they traditional private equity associate role is Entirely morphing.

00:15:29: it really is

00:15:30: its becoming what he calls exit engineering.

00:15:32: You can no longer Just sit in a cubicle model A beautiful entry case with a standard five-year sponsor to sponsor exit.

00:15:38: Yeah call it today.

00:15:39: now those days are gone

00:15:41: right.

00:15:41: You have to design the exit architecture whether that's a strategic sale, continuation vehicle or NAV financing from day one of whole period.

00:15:49: The exit isn't destination at year five anymore.

00:15:52: it is structural component.

00:15:53: in original thesis.

00:15:55: It requires a level of foresight and financial creativity that simply wasn't necessary when multiple expansion guaranteed a profitable exit for everyone.

00:16:04: The bar has been raised

00:16:05: permanently.".

00:16:12: But I want to leave you with one final provocative thought to mull over when you look at your own business, drawing from a fantastic post by Patrick Moran.

00:16:27: Yeah it's a perspective that completely reframes how we look at balance sheets and enterprise value.

00:16:31: exactly most private equity firms go through diligence And they price of target companies proprietary data as an infrastructure cost

00:16:39: right?

00:16:39: A liability?

00:16:40: yeah It just sits is a line item in the IT budget.

00:16:43: but moran argues That Data Is Actually Inventory.

00:16:47: Think about it mechanically.

00:16:48: It compounds over time, it has exclusivity and most importantly if you deploy through those AI horizons we discussed...it can be monetized!

00:17:00: If you are just treating your portfolio's data as an IT expense You're leaving the actual defensible moat completely out of your exit multiple.

00:17:08: So the question that you have to ask yourself when going back work tomorrow is How are you classifying data in current portfolio?

00:17:15: Is it just a cost center or is your most valuable inventory?

00:17:18: Such great question to end on.

00:17:20: If you enjoyed this episode, new episodes drop every two weeks!

00:17:23: Also check out our other editions on Venture Capital, M&A and Strategy & Consulting.

00:17:27: Thank-you so much for joining us on This Deep Dive.

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00:17:32: Seep questioning the spreadsheet And we'll see ya next time.