Best of LinkedIn: Private Equity Insights CW 24/ 25

00:00:00: Provided by Thomas Allgeier and Frennes, based on the most relevant LinkedIn posts about private equity in CW-TwentyFour and TwentyFive.

00:00:08: Frenness supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.

00:00:15: You can find more info in description.

00:00:17: This edition is brought to you in partnership with Informa.

00:00:21: Don't miss out on their upcoming conference, Super Return CFO COO and Super Return Global Infrastructure.

00:00:28: Find the link of conferences in description.

00:00:30: So for today's deep dive, our mission is to explore the absolute top private equity trends that we've seen across LinkedIn over the past

00:00:37: two weeks.

00:00:38: Yeah We're really aiming to just cut through all the fluff You know?

00:00:40: We want to deliver actual actionable insights view on strategy M&A and investments based purely in what the industry experts are saying

00:00:47: right now Exactly!

00:00:48: And uh...to set the stage for you I want you imagine something.

00:00:51: Imagine someone hands you five billion dollars To buy a software company

00:00:55: Which..you know Sounds like a pretty good day.

00:00:57: Right, I mean the thesis is ironclad.

00:01:00: The market is growing.

00:01:01: your spreadsheets show this incredibly clean path to a massive exit but then just a few short years later Exactly.

00:01:13: And suddenly your debt burden is just suffocating the company's cash flow and instead of restructuring, you're private credit lenders literally walk in to take the keys Just like that?

00:01:23: The equity has entirely wiped out.

00:01:25: five billion dollars gone.

00:01:26: So today we are dissecting why this old private equity playbook Is completely dead.

00:01:31: It really a massive structural shift.

00:01:33: We were moving from pure financial engineering to an era of honestly just pure operational survival.

00:01:40: Right, and let's start with the sheer scale of pressure that is building up in this system right now because looking across curated insights from these past two weeks there has been underlying panic about liquidity.

00:01:52: like Lee McCabe described it recently as private equities quote trillion dollar constipation problem.

00:01:59: That Is Quite The Visual.

00:02:00: It really is, but I mean it means you have massive amounts of dry powder right?

00:02:05: But a quarter has literally just been sitting there for over four years.

00:02:10: Yeah, undeployed!

00:02:11: Yeah.

00:02:11: Which is wild, you have firms charging management fees on stagnant money while at the same time they're telling their limited partners that the opportunity set out there is super robust

00:02:21: which is such a tough sell.

00:02:22: like if I'm an LP i just want my cash back

00:02:24: exactly.

00:02:25: but to understand why this backlog even exists we really have to look at the mechanics of how private equity actually generated returns for the last decade.

00:02:35: Snor Co-Food Hansen analyzed some recent McKinsey data on this and it paints a very stark picture.

00:02:40: yeah Let's get into those numbers.

00:02:42: So from twenty-ten to twenty-twenty two, fifty nine percent of buyout returns came from just two levers leverage and multiple expansion.

00:02:49: Wow!

00:02:51: Fifty nine percent?

00:02:52: Yep that era is dead.

00:02:54: alpha no longer a given.

00:02:55: you have to actually make it now

00:02:57: Right.

00:02:57: because well let's put this way It sounds like PE used to be house flipper in the booming neighborhood.

00:03:03: right You just by the house wait for more because market went up.

00:03:08: That

00:03:08: exactly yeah.

00:03:09: But Now You actually have to go in and fix the plumbing, you have to knock down walls.

00:03:13: You actually had to improve the house.

00:03:15: but here's my question if exits are totally stalled because nobody is buying these houses how were they LPs getting their cash?

00:03:25: Well that's where things are getting pretty creative And sometimes a bit desperate.

00:03:30: Rajesh Rajan shared great takeaway from The Super Return Conference In Berlin.

00:03:34: He noted that the average PE fund now outlasts the average American marriage two-fold.

00:03:40: Wait, really?

00:03:41: Two fold!

00:03:41: Yeah so because of that crazy duration GP led secondaries have become this mainstream tool.

00:03:47: it's basically a way to manufacture liquidity.

00:03:49: okay so that's one structural fix.

00:03:51: but there's another tactic gaining traction right now that I read about and it seems actively destructive.

00:03:56: you're talking about the dividend recapitalizations.

00:03:59: yes David Harmeyer noted that PE owners have recently tapped into this hot loan market for three point five billion dollars in dividend recapitalizations and that's just to pay themselves.

00:04:11: Yeah basically taking out a massive high interest mortgage on the company, just to fund distributions for the LPs.

00:04:17: I mean hold on if the exit market is stalled because debt Taking out junk loans to pay a cash dividend sounds incredibly reckless.

00:04:28: You're just strapping a heavier debt burden onto business that might already be struggling.

00:04:32: It is massive risk, you are totally reducing the company's free-cash flow in process.

00:04:37: and for listening why should care about this?

00:04:39: Well if your underwriting a deal today...you cannot rely on multiple expansion to save you!

00:04:46: You must underwrite operational execution.

00:04:48: Right which brings up really profound concept from Philip Kraft.

00:04:52: Since financial engineering is dead, the conversation has to pivot to how companies are actually transformed.

00:04:57: And Kraft separates this into buying an asset versus transforming in

00:05:01: organism.".

00:05:02: Oh I love that framing.

00:05:03: it's so accurate!

00:05:04: Yeah right because PE has mastered buying assets you know?

00:05:07: You do the financial due diligence...you model the cash flows but an organism with its people..its internal incentives....it's culture that has to be deeply understood.

00:05:17: yeah

00:05:17: and asset is what's.

00:05:19: An organism is the living, breathing company.

00:05:23: And the brain of that organism is its leadership which connects to a point Maxwell Salazar made.

00:05:29: What

00:05:29: did he say?

00:05:30: He noted while PE investors have like men's level IQs for deal sourcing and structuring complex debt That is completely different muscle than actually evaluating as CEO.

00:05:40: I mean sure but surely they figured out post-close right.

00:05:44: Don't these funds just swap out the CEO if things go south during the whole period?

00:05:48: They

00:05:48: do, but it's a huge problem.

00:05:49: Simon Taylor shared a shocking stat on this... Over seventy percent of PE-backed CEOs are replaced in the whole

00:05:56: time.

00:05:56: Wait!

00:05:56: Seventy

00:05:56: percent?!

00:05:57: That is insane!

00:05:58: And mostly unplanned….

00:06:00: Think about the mechanics of that — you spend six months realizing The current CEO isn't working another six months doing an executive search, then the new CEO takes six months to onboard.

00:06:11: You've just wasted almost two years of operating time...

00:06:13: Which you just can't

00:06:14: recuse?

00:06:14: Exactly!

00:06:15: So to fix this funds have to integrate CEO assessment into the take private diligence phase not wait until after close

00:06:23: Right and it extends beyond just the CEO too.

00:06:26: It's about a connective tissue between the deal team in operations.

00:06:31: Jack Seierd and Mohamed Shaheen brought up the perspective of The Operating Partner, and Chief Transformation Officer.

00:06:37: Yeah, Shaheen frames this really well.

00:06:39: he notes that PE isn't just finance anymore it's translation.

00:06:42: Translation I like

00:06:43: that right?

00:06:43: Right!

00:06:43: The operating partner has to translate that Excel deal thesis into actual operational reality on the factory floor.

00:06:50: And they have do using judgment & influence not just title authority

00:06:53: Because if the financial model conflicts with the operational reality things break down fast.

00:06:59: In fact, Trey Payne shared a specific diligence blind spot example that proves this perfectly.

00:07:05: It's a warning about construction company.

00:07:07: Oh yeah the bonding capacity issue.

00:07:09: Exactly

00:07:09: so.

00:07:10: A PE firm buys a construction company.

00:07:12: They look at the balance sheet they see it under levered and decide to add debt.

00:07:17: Standard playbook right?

00:07:18: Totally standard.

00:07:19: On paper...they optimize asset.

00:07:21: But in real world The operational organism winning construction projects require surety bonding and to issue a bond, the surety company heavily scrutinizes the balance sheet.

00:07:31: So by simply adding debt mechanically?

00:07:34: The PE firm accidentally destroys the companies bonding capacity!

00:07:37: Right which means they can't bid on projects that actually drive their revenue.

00:07:41: it's And it doesn't show up in the spreadsheet until its way too late.

00:07:47: It's wild, and you know if transforming these organisms is really that fragile... ...and operational execution as the only way out.. ..it totally explains why the buzzword on every sponsor's lips right now is AI!

00:07:59: Oh absolutely everyone wants AI to drive Evita

00:08:02: But is actually doing or just a shiny new toy?

00:08:06: Because Scott Engler from FTI Data gave massive reality check on this.

00:08:10: He said ninety five percent of AI pilots in PE portfolios are working which sounds great.

00:08:15: Sounds amazing, yeah!

00:08:16: But then he adds that a staggering only seven percent have actually reached enterprise-wide scale.

00:08:21: Seven percent?

00:08:23: That is a massive execution gap and the root cause of that gap isn't actually the AI models themselves.

00:08:30: insights from Karsten W and Paul Stoop explain this perfectly.

00:08:34: AI failures are basically data foundation problems.

00:08:37: How so?

00:08:38: Well think about a company's internal data.

00:08:41: It's usually super fragmented.

00:08:42: You might have a situation where the word revenue means four completely different things to for different internal teams.

00:08:48: Oh, right sales thinks it mean signed contracts.

00:08:51: finance think its collected invoices

00:08:53: exactly.

00:08:53: So if you point an AI model at that fragmented data?

00:08:56: Yeah is just gonna confidently hallucinate.

00:08:58: you Have to build a semantic layer and establish governed definitions across The whole enterprise before he can even claim you have an AI strategy.

00:09:04: Okay, let's unpack this for a second.

00:09:06: If data is the ultimate bottleneck are we seeing PE firms actually go out and buy data infrastructure instead of just trying to implement AI software?

00:09:14: Yes absolutely!

00:09:15: We're definitely seeing this trend now.

00:09:17: RL Sadi did an analysis of Primera acquiring majority stake in CDP

00:09:23: The sustainability organization?

00:09:25: Yeah, exactly.

00:09:26: Now at first glance you might think Premier is just buying a sustainability charity or doing an ESG play.

00:09:31: but they aren't!

00:09:32: They are actually carving out the commercial business to mine.

00:09:36: massive proprietary data sets.

00:09:38: Wow

00:09:39: risk!

00:09:39: Data across carbon emissions supply chains physical risks because in the AI era raw structured sustainability data is now business critical intelligence.

00:09:50: So they're basically securing the data tool booth?

00:09:52: Exactly, and for the portfolio companies trying to actually use these tools.

00:09:56: Diana Wehmberger had a great observation from Superreturn.

00:09:59: What did she notice?

00:10:00: She said... the ones crossing that seven percent scaling threshold, they are waiting for a sponsor mandate.

00:10:09: They're led by these intellectually curious CEOs who just experiment relentlessly...

00:10:14: Which loops right back to the CEO talent evaluation problem we talked about earlier!

00:10:19: If you don't have the right leader running the organism The tech stack doesn't even matter?

00:10:23: Nope

00:10:23: not at all.

00:10:24: So okay We know the playbook has fundamentally shifted into intense operational execution and building AI readiness.

00:10:32: With that extremely high bar, what kind of deals are actually crossing the finish line right now?

00:10:37: Where is the money actually going?

00:10:38: Well

00:10:38: Adam Coffey laid out this ultimate five-filter blueprint Of what PE is actively hunting for.

00:10:44: Let's

00:10:44: hear it.

00:10:44: first

00:10:45: needs based businesses.

00:10:46: second recurring revenue.

00:10:48: third low capital intensity.

00:10:51: fourth a fragmented market.

00:10:53: and fifth A highly scalable model.

00:10:55: That makes total sense.

00:10:56: It mitigates almost all the operational risks we just talked about, and you can actually see this playing out in live market data.

00:11:04: Nicola Ebbmeyer and Frister Haviman track this.

00:11:06: And they found that services, consumer, NTMT so technology media and telecom currently dominate the European live PE

00:11:15: pipeline.

00:11:16: Yeah They make up sixty three percent of deals right now.

00:11:18: Sixty-three percent.

00:11:19: But obviously even within those favored sectors not everyone is winning.

00:11:23: Let's contrast two massive real world deals That perfectly illustrate The current stakes.

00:11:29: Yeah, we have a clear winner and very clear loser.

00:11:31: Right!

00:11:32: So on the winning side Alistair Matchette broke down EQT's ten point nine billion pound.

00:11:37: take private of InterTech.

00:11:39: EQT actually paid a forty percent premium to secure that deal which

00:11:42: proves if you had high quality asset with durable cash flows The capital is definitely still there Absolutely.

00:11:48: But then We Have The Losing Side.

00:11:50: Francisco Jimenez servant analyzed Tom Abrabo completely devastating five-billion dollar wipeout.

00:11:56: This is the exact scenario I brought up at the very start of The Deep Dive.

00:12:00: Yeah, the five billion dollar evaporation it's such a cautionary tale.

00:12:04: Can you explain why?

00:12:06: behind that medallion wipeout?

00:12:07: What actually happened there?

00:12:09: Well its basically the story of peak twenty-twenty one software valuations colliding with interest rate hikes and AI disruption.

00:12:17: Tom Abravo took them private at the absolute peak of the sauce bubble And they funded it with significant floating rate debt.

00:12:25: Ouch!

00:12:25: Floating rate debt going into a rate hike cycle.

00:12:28: Exactly, so the debt payment skyrocketed.

00:12:30: cash that was supposed to go to R&D Was just consumed by the debt and at the exact same time generative AI started disrupting their core customer service software model.

00:12:40: So they needed to invest heavily Just to survive but they had no cash because of the debt.

00:12:45: It's a total death spiral it really

00:12:47: is.

00:12:47: The financial structure literally Choked the organism, but the most fascinating part of this whole thing is what happened at The end when Tom Abravo decided they wouldn't inject any more cash into business.

00:12:57: The private credit lenders which was a consortium led by Blackstone and Apollo.

00:13:02: They didn't just restructure that dad.

00:13:04: What

00:13:04: did they do?

00:13:04: He simply took the keys before closed and to control the equity.

00:13:09: Wow That is ruthless.

00:13:11: it completely redefines the risk.

00:13:13: dynamic Private credit lender are basically saying if you can run this we will.

00:13:18: Yeah, they're highly sophisticated operators now.

00:13:20: They aren't just passive financiers anymore

00:13:23: with the stakes being that incredibly high in the mega cap software space.

00:13:27: I guess it makes sense That sponsors are looking for safer hunting grounds places where they can run a more traditional consolidation playbook

00:13:34: exactly and Laurent Della Marlier pointed out A really interesting geographical trend For this.

00:13:40: he says Italy is currently The prime hunting ground In Europe for buy-and-build strategies.

00:13:45: Italy

00:13:46: Really?

00:13:47: Yeah, it basically offers the exact same fragmentation and succession-driven founder exits that Northern Europe offered fifteen years ago.

00:13:55: You have thousands of these small family owned businesses in resilient sectors And the founders are aging out without a clear successor.

00:14:03: That perfectly hits Adam Coffey's five filters.

00:14:06: you buy a platform in Italy Consolidate the fragmented regional players professionalize the management and you avoid those crazy mega cap valuation risks.

00:14:15: Exactly!

00:14:16: You transform the organism without betting on a fund on a twenty-twenty one software multiple, which actually brings me to a final really provocative thought for you to mull over as we wrap up today.

00:14:27: Let's

00:14:27: hear it.

00:14:28: Think about what we've covered...you have private credit lenders taking keys to busted PE deals like Medalia essentially acting as equity owners.

00:14:37: And on the flip side, you have traditional PE firms buying foundational data architecture like CDP to build semantic layers.

00:14:44: Which means they're operating more specialized tech companies than financial engineers.

00:14:48: That's a huge blur in industry lines Right.

00:14:50: The traditional boundaries of what defines a private equity firm are completely dissolving.

00:14:55: So the question is, are we looking at a future where PE firms or essentially just technology holding companies?

00:15:00: Will the ability to structure debt even matter Or as the entire industry.

00:15:04: Just splitting into those who build digital infrastructure and those Who simply finance it?

00:15:08: that is A fascinating Question To leave off on definitely something to think about.

00:15:12: if you enjoyed this episode new episodes drop every two weeks.

00:15:16: Also check out our other editions on venture capital M&A and strategy in consulting.

00:15:20: Thank You so much for joining us And don't forget to subscribe.

00:15:23: We'll catch you next time.