Best of LinkedIn: Private Equity: Value Creation CW 30/ 31

00:00:00: provided by Thomas Allgaier and Frendess, based on the most relevant LinkedIn posts about private equity.

00:00:06: Value creation insights in calendar weeks.

00:00:08: thirty-and-thirty one.

00:00:10: Frendes supports PE back manufacturers with the market intelligence needed to unlock revenue from idle production capacity.

00:00:17: You can find more info in description.

00:00:19: Yeah.

00:00:19: so today's mission is really unpacking top private equity value creation trends that are you know, surfacing across LinkedIn right now.

00:00:28: Right

00:00:28: exactly.

00:00:29: and we've clustered these insights into four core themes for this deep dive.

00:00:34: yeah We're looking at the new macro math of PE execution discipline in leadership integration particularly the first hundred days And then AI adoption across portfolios.

00:00:45: Yeah which is a massive one.

00:00:46: But I think we really have to begin with the macro environment, right?

00:00:49: Because it completely dictates why the actual mechanics of value creation... Well they've just drastically changed this quarter.

00:00:56: Oh

00:00:56: totally!

00:00:57: The whole interest rate cycle era-the idea that will do heavy lifting for you.

00:01:01: It did.

00:01:02: We're seeing end multiple expansion as a crutch.

00:01:05: Yeah and the sheer math is stark.

00:01:08: There was data shared by LimaCabe puts it in perspective.

00:01:12: Oh

00:01:12: right, the shift and return targets?

00:01:14: Exactly!

00:01:16: So back in the twenty-tens if you were underwriting a typical deal You really only needed about five percent annual EBITDA growth to hit two point five extra turn Right

00:01:26: over standard five year hold because you had low borrowing costs.

00:01:29: Yeah, low borrowing cost high leverage.

00:01:31: but now we pointed out that twelve is the new five.

00:01:34: Wow!

00:01:34: Twelve percent.

00:01:36: yeah

00:01:36: You need ten to twelve percent annual EBITDA growth To hit those exact same return targets Because borrowing costs are hovering around.

00:01:43: what eight to nine percent?

00:01:44: Yeah and leverages drastically lower.

00:01:46: so that entire old financial model just it breaks.

00:01:50: It completely breaks.

00:01:50: and that's not just a minor adjustment in a spreadsheet, That is a staggering jump In the day-to-day operational expectations.

00:01:57: you're putting on a portfolio company

00:01:59: Right And your demanding that explosive growth at time when I mean The exit window was practically nailed shut right now.

00:02:05: Oh

00:02:05: yeah its so backed up.

00:02:07: Yeah.

00:02:07: Scott Engler highlighted his stat recently There an eleven year backlog of unsold PE-backed companies sitting in the US right now.

00:02:17: Wait,

00:02:17: eleven years?

00:02:18: Eleven years worth of inventory exactly thirteen thousand three hundred and twenty five companies just waiting.

00:02:24: That is insane.

00:02:26: so you absolutely cannot underwrite a deal assuming You'll just flip it in three years to a bigger sponsor.

00:02:31: Oh,

00:02:31: you can't.

00:02:32: which creates this massive liquidity pressure cooker.

00:02:36: And uh Rohula Hujo brought up another wild statistic on this.

00:02:40: Oh, the zombie funds right?

00:02:42: Yeah.

00:02:43: Nearly three hundred and forty eight point.

00:02:44: five billion dollars is locked up in these zombie funds that are ten years old or more.

00:02:49: Three

00:02:49: hundred and forty eight billion.

00:02:51: I mean think about the mechanics there.

00:02:53: these holds were never planned to last this long

00:02:55: exactly And a lot of them are bought at absolute peak valuations.

00:02:59: So if you can't rely on multiple expansion, then you

00:03:01: definitely cannot rely on aggressive top-line revenue growth right now.

00:03:04: Right?

00:03:05: so your options just shrink.

00:03:06: they shrink down to the most reliable lever left on an extended hold which is cost out Mmm specifically procurement.

00:03:12: yeah Procurement is emerging as the fastest lowest risk even deliver.

00:03:17: Because if you try to drive top-line growth, You have to invest in sales marketing.

00:03:21: Which burns

00:03:22: cash?

00:03:22: It burns cash and takes quarters to realize.

00:03:25: but If you renegotiate a vendor contract every single dollar drops instantly into the margin.

00:03:31: Yeah

00:03:31: it's pure mechanics.

00:03:33: when The tide of cheap capital goes out you see Who built a real operating engine And who was just sailing on the current

00:03:40: spot on.

00:03:41: But with these extended holds How are firms fundamentally changing their day-to-day operations?

00:03:47: Because identifying savings in an Excel model is very different from, you know actually realizing it on the shop floor.

00:03:53: Oh completely different and that's exactly where the pressure shifts right.

00:03:56: It goes entirely to The operating plan And leadership team executing it.

00:04:00: You have to transition From spreadsheet modeling To daily execution.

00:04:03: Right because exit multiples aren't built In the boardroom anymore They're building daily decisions

00:04:08: Exactly!

00:04:09: And Sharif Dweeke made this point brilliantly.

00:04:11: He noted that the highest exit multiples come from disciplined operating systems, not complex financial models.

00:04:35: Revenue to margin because that's where most management teams just stumble.

00:04:38: Oh, they

00:04:38: stumble hard.

00:04:39: Yeah Because every micro decision impacts at flow.

00:04:42: are your sales reps pricing for actual value or there?

00:04:46: Just you know discounting to hit a volume quota

00:04:49: just to get their commission

00:04:50: Exactly?

00:04:51: Or your plant managers?

00:04:52: Are They maximizing the machines You already have or they're just demanding capex For new capacity

00:04:58: because it's easier than fixing A scheduling bottleneck?

00:05:00: yes those daily Micro decisions dictate The margin.

00:05:05: And yet when PE firms try to institutionalize this discipline, they usually just well...they over-engineer it.

00:05:11: Oh!

00:05:11: They shoot themselves in the foot every time.

00:05:13: Dan Kremerns made a fantastic case about that.

00:05:16: he said value creation plans VCP's consistently fail because there are too complicated.

00:05:22: oh yeah we've all seen them The fourteen different work streams nested Gantt charts.

00:05:27: right.

00:05:27: complexity feels so smart and diligence meeting but is an enemy of execution.

00:05:33: He argues that one page plans are the only ones that actually get implemented.

00:05:37: Okay, let's unpack this because I have to push back a little.

00:05:40: Are we over rotating on simplification here?

00:05:42: At what point does a one-page plan just become like a platitude?

00:05:47: It is fair question!

00:05:49: Right if you buy complex manufacturing business can really distill it onto one piece of paper without losing nuance.

00:05:55: You should do or the organization paralyzes itself.

00:05:58: Mario D'Amosino recently studied a framework by John Kelleher on this exact friction.

00:06:03: Well, the ten tests for VCP?

00:06:04: Yeah

00:06:05: and-and The ultimate test!

00:06:06: The one that decides if the plan survives contact with reality is whether you can synthesize the whole thesis into one sentence That any shop floor employee can understand in five seconds.

00:06:16: All right...the example was uh bring the jets home to increase revenue By one billion dollars.

00:06:22: Exactly

00:06:23: it gives the whole organization a no north star.

00:06:25: If an engineer is choosing between two projects, they just ask does this bring the jets

00:06:30: home?

00:06:30: Yeah because if you need a hundred page deck to explain priorities they're not going to execute any of it.

00:06:36: They won't remember it, and translating that one sentence into action requires a really specific rhythm.

00:06:43: Joe Kitson pointed out that execution strength isn't about org charts

00:06:47: right?

00:06:47: It's the meeting cadence.

00:06:48: exactly.

00:06:49: most executive teams get bogged down in these sprawling three-hour weekly meetings where It's the worst.

00:06:57: Instead, you need a highly disciplined rhythm—a weekly tactical to unblock hurdles... ...a monthly step back.... A quarterly reset and an annual direction setting

00:07:06: off-site.".

00:07:07: Because if you don't enforce that?

00:07:09: The business starts running in the executive team.

00:07:11: Exactly!

00:07:12: But there is a gaping hole in this logic.

00:07:15: we really have to adjust…

00:07:16: Of integration peace.

00:07:17: Yes A brilliant one-page plan and a perfect meeting cadence are totally useless if the data feeding into those meetings is garbage.

00:07:26: Which brings us to the first hundred days post close, and Koy Wright framed this perfectly.

00:07:31: Every deal actually has two closing dates

00:07:34: The boardroom celebration Yep,

00:07:35: the champagne And then Monday morning.

00:07:38: that's when the ERP systems have to integrate And research shows that seventy to ninety percent of deals fall short of their underwritten value.

00:07:46: Because of tech integration failures.

00:07:48: in those first hundred days, you find out the Target company is running critical inventory on like fragile spreadsheet macros from twenty nineteen

00:07:55: built by an intern right.

00:07:57: and The only person who understands the legacy CRM just quit.

00:08:01: it's terrifying.

00:08:02: Philip Kraft shared a story about a due diligence engagement where targets contribution margin dropped From seventy nine percent down to forty five percent

00:08:09: overnight

00:08:10: over night just wiped out millions in enterprise value gone before the VCP even starts.

00:08:16: And it happened entirely because of unreconciled financial assumptions, they didn't lose a single customer!

00:08:21: Wait explain to mechanics how that happens?

00:08:23: So imagine the target logs their shipping costs below-the line artificially inflating gross margin.

00:08:29: but acquiring firm requires freight and cost of goods sold.

00:08:33: Oh wow The moment you merge books and reconcile logic That pristine, seventy-nine percent margin just evaporates.

00:08:41: That is brutal and you know.

00:08:43: Meryl Varguez highlighted how systemic this risk gets in rollups specifically at home services.

00:08:49: Right the HVAC and plumbing roll ups.

00:08:51: Yeah

00:08:51: PE buys forty companies And on paper The thesis is flawless Consolidate back office Leverage scale.

00:08:58: But they forget.

00:08:59: They now have forty different brands, forty websites and forty disconnected CRM.

00:09:03: Exactly!

00:09:04: Marketing integration gets totally ignored.

00:09:06: so you've got forty portfolio companies all bidding on the same plumber near me Google search terms in this city.

00:09:13: You're

00:09:13: literally paying google to bid against yourself.

00:09:15: Griving

00:09:15: up your own customer acquisition costs.

00:09:18: The brand cannibalize each other And value stalls.

00:09:21: Well,

00:09:21: Greg Milhop made a great point about this.

00:09:23: The CFO of a buy and build platform is a completely different job than a standalone CFO.

00:09:29: They have to build infrastructure for the platform you're building toward not the fragmented business You bought on day one spot-on.

00:09:37: it requires a totally different mindset.

00:09:38: Yeah.

00:09:39: And here's where it gets really interesting.

00:09:41: before we get into how AI is disrupting these integrations If you're finding this deep dive valuable make sure to subscribe so you don't miss future additions.

00:09:48: highly recommend

00:09:49: But honestly, ignoring that integration in a roll-up is like buying a fleet of luxury cars but forgetting you have to pave the road for them.

00:10:03: migrating forty CRMs into one is so manual and expensive.

00:10:08: everyone's looking to AI as the silver bullet.

00:10:10: Right,

00:10:10: AI adoption in that portfolio.

00:10:12: but most firms are deploying it.

00:10:14: entirely wrong

00:10:15: Totally wrong!

00:10:16: There's this massive gap between the AI hype and actual financial returns.

00:10:20: Eric Janssen brought up a recent PwC survey of PE-backed CEOs.

00:10:25: The numbers... well they're

00:10:27: harsh.

00:10:28: Only fourteen percent say AI has delivered higher revenues and lower cost.

00:10:32: Fourteen percent, because they trade it as just another SaaS tool.

00:10:37: but Paul Brock argued the biggest ROI isn't in glamorous software companies

00:10:41: It's in the labor-intensive unglamorous businesses Logistics, health care.

00:10:46: Yes

00:10:47: where AI can eat that six percent.

00:10:49: coordination overhead by embedding directly into existing ERPs.

00:10:53: Right.

00:10:53: so instead of forcing a dispatcher to cross-reference three screens The AI just reads the inbound email checks inventory and routes the truck automatically

00:11:02: Silently eating that overhead and dropping it straight to the bottom line.

00:11:06: but getting an organization To actually trust that requires fundamentally breaking old habits

00:11:11: which is incredibly hard

00:11:12: It is.

00:11:13: Jared Berman shared a case study at TZP Group, they went from zero licenses to firm-wide adoption in twelve months.

00:11:18: and he did that by like literally blocking Google on his own laptop?

00:11:22: Yes!

00:11:23: He forced himself to use LLMs for search...to force the habit change..and then ran CEO hackathons.

00:11:29: That's amazing Because

00:11:30: you can't just buy software seats and hope culture shifts.

00:11:33: No You have to force operating muscle to adapt.

00:11:36: And Parth Patel made point about scaling this.

00:11:39: The winners treat AI as a firm-level platform.

00:11:43: Build once, deploy many.

00:11:45: Because if you're rebuilding AI governance and data foundations deal by deal that's just an expensive tax on EBITDA!

00:11:52: You are funding the reinvention of the wheel forty different times Exactly

00:11:56: which actually brings up existential question for industry.

00:11:59: So what does this all mean?

00:12:01: With AI lowering barrier to writing software Are we about see massive repricing of software multiples in middle market?

00:12:09: I mean, Joss Duggan certainly thinks so.

00:12:11: He issued this warning on AI-era sauce motes.

00:12:14: basically if a funded team can rebuild your core feature set in six months you have no moat.

00:12:19: Wow!

00:12:20: So why would a PE firm pay fourteen X revenue for that?

00:12:22: They won't.

00:12:23: The real value is now proprietary data distribution trust and regulatory embedding.

00:12:28: Right because the startup could copy your interface but they cant' copy.

00:12:31: ten years of localized patient records

00:12:34: Or decade of hypo compliance audits That Trusts Is The Ultimate Moat.

00:12:39: It's incredible how all this connects.

00:12:41: The macro pressure forces you to find operational margin, try and build a one-page plan.

00:12:46: realize your data integration is broken.

00:12:48: turn the AI and then realized that AI completely changes value assets.

00:12:53: it's complete ecosystem really.

00:12:55: if take on thing away from deep dive despite talk of AI automating future ultimate moat right now.

00:13:03: human alignment Yeah.

00:13:05: If your leadership team can't execute a one-page plan or hold a discipline meeting, no LLM is going to save you.

00:13:12: exit multiple AI just accelerates the engine that already has.

00:13:15: So you better make sure the engine actually works?

00:13:17: Exactly!

00:13:18: if enjoyed this episode new episodes drop every two weeks.

00:13:21: also check out our other editions on PE value creation pe exo strategies vidger capital M&A and strategy in consulting.

00:13:29: thanks so much for joining us On This Deep Dive.

00:13:31: Make Sure To Subscribe And We'll Catch You On The Next One.