Best of LinkedIn: Private Equity: Exit Strategies CW 30/ 31

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

00:00:05: Exit strategies insights in calendar weeks.

00:00:07: thirty-and-thirty one.

00:00:09: Frenness supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.

00:00:16: You can find more info in description.

00:00:18: To put this whole thing into perspective right out of gate there are roughly thirty three thousand Private Equity backed companies just you know sitting unsold.

00:00:28: Yeah, that is a sheer bottleneck of unrealized value trapped in the market and it's fundamentally breaking the traditional buyout lifecycle.

00:00:35: Exactly so.

00:00:36: today's deep dive has strictly focused on the top private equity exit strategies trends dominating conversations across LinkedIn specifically tailored for you to strategy M&A and investment professionals navigating this massive gridlock.

00:00:49: Right, because we are unpacking a lot today.

00:00:51: We're going to dive into the liquidity backlog or reshaping hold periods that brutal new standards for exit readiness some really creative deal structures replacing traditional IPOs and finally how AI is just violently compressing.

00:01:05: Yeah, and to really understand any of these shifts you have to start with the sheer scale.

00:01:10: Of the liquidity backlog I mean thirty three thousand unsold companies.

00:01:15: we are talking about an estimated three point eight trillion two four trillion dollars in unrealized value.

00:01:20: Wow

00:01:21: That is just a staggering amount of capital stuck in the system.

00:01:24: It really is, and going by data from Bain & Pitchbook that Michael Hutto Peter Dinias and John McRoberts were discussing at the current pace of exits it will take nine years to clear that existing inventory.

00:01:37: Wait!

00:01:37: Nine years?

00:01:38: I mean...that's structural crisis for asset class.

00:01:40: In traditional LBO model you underwrite What, a three to five year hold rate?

00:01:44: Exactly.

00:01:45: So your debt facilities, you're interest rate caps Your management incentive pools All of that is sized around the specific timeline.

00:01:52: When a hold stretches toward decade You start hitting debt maturity walls

00:01:55: Right and have to refinance in much higher interest rate environment Which instantly cannibalizes your equity returns.

00:02:03: Plus.

00:02:03: y'know The original management team you backed Might be burning out right when wanted to be ex-A.

00:02:08: Yeah, and that misalignment is showing up clearly in the returns.

00:02:11: Hamza Shahed & Kevin Dowd were analyzing CARTA's data on this... ...and The Median Hold Time for a buyout backed company has stretched from three point two years just a few years ago to over four-point five years today.

00:02:23: And the direct consequence of that extended hold?

00:02:26: Is it?

00:02:26: the return profiles are shrinking dramatically.

00:02:29: I mean nearly one in three exits right now fails to break even

00:02:33: Which is wild!

00:02:35: the math behind why those returns are shrinking is what we really need to highlight.

00:02:41: For Shannon Talbot and Scott Engler pointed to a highly publicized five billion dollar loss on a massive buyout by Tom Abravo as the ultimate proof of this shift.

00:03:07: You just can't rely on market timing anymore.

00:03:09: Returns today depend strictly on the operational alpha you actually build into

00:03:21: because I saw a counterpoint from Nikola Ebbmeyer and Joel Waver.

00:03:25: And they noted that sometimes holding is a feature, not a bug.

00:03:28: Oh like letting winners compound?

00:03:30: Exactly!

00:03:31: They pointed out some of the highest returning PE assets were held in sponsor portfolios for ten to twenty years...they just let them run

00:03:41: Right.

00:03:41: The mechanics there are fascinating because multiple different sponsors rotate in and out, but the core compounding engine of the business is never disrupted And we're still seeing proof that the classic multi-year buildout works when executed flawlessly.

00:03:55: Yeah Stephen Paul's highlighted a mega deal.

00:03:58: example for this Advent & Symbons recent thirty four point four billion dollar sale of TK elevator to Konte.

00:04:04: That deal is huge.

00:04:05: it proves the old playbook still yields mega returns right?

00:04:08: because it wasn't just holding for the sake of holding.

00:04:11: They carved that business out, spent five years heavily investing in digital infrastructure and transformed it.

00:04:16: Flawless execution!

00:04:18: But since you can no longer rely on a rising market tide to float an average asset to a quick exit.

00:04:23: how do you actually get a company out the door today?

00:04:26: It requires a brutal multi-year approach to exit readiness.

00:04:31: It really does.

00:04:32: Exit readiness is accumulated...It's not just assembled at last minute.

00:04:36: Simon LaRue and Daryl Bates Brownsword were very clear that exit planning has to begin two-to five years prior to a sale.

00:04:43: Yeah, focusing on reducing founder dependence in building predictable revenue.

00:04:46: Exactly!

00:04:47: You can't just optimize your working capital in month eleven of year four and expect buyers pay a premium?

00:04:52: No not at all.

00:04:53: And Ben Banks highlighted his specific operational trap here platform fragmentation.

00:04:58: Oh,

00:04:59: right with buying bills.

00:05:00: Yeah like a baseline diagnostic must be run before the first bolt-on acquisition otherwise The complexity bakes into the operating model and buyers will destroy your margin visibility at exit.

00:05:10: It's like the traditional exit process used to be icing a cake At last minute whereas the new market demands baking the equity story directly Into the batter.

00:05:19: so if buyers are underwriting durability What's the biggest red flag they look for today?

00:05:26: well Veneraman points out that growth must be directly traceable to operational decisions, not market conditions.

00:05:32: Right they want to see exactly what levers you pulled?

00:05:34: Exactly.

00:05:35: and Alexis Korsky notes that heavy client concentration especially relationships held personally by the founder will severely discount a business.

00:05:43: plus Adam Coffey mentioned buyers will explicitly ask how your business performed during the two thousand eight or twenty-twenty downturns.

00:05:51: if You can't explain your recovery Your businesses worth nothing

00:05:54: which is such a high bar.

00:05:55: And by the way, if you are finding this breakdown useful for your own deal flow make sure to subscribe so that you don't miss our future deep dives because with traditional IPOs and clean strategic sales bottlenecked right now The pressure in system is releasing through highly creative sometimes controversial deals.

00:06:11: structures.

00:06:12: Oh big time.

00:06:13: We are seeing an absolute explosion of sponsor-to-sponsor trades and bolt ons.

00:06:19: Gavin Givens highlighted that in the UK out of seven hundred ninety seven buyouts In the first half of twenty twenty six six hundred to two were add-ons.

00:06:26: Wow, six hundred and two.

00:06:28: That's massive.

00:06:29: And Archie Samson noted PE is even rolling up traditional partnerships now like Grant Thornton a seven point two billion dollar acquisition of CBiz.

00:06:37: Yeah for sponsored or sponsored trades.

00:06:39: Brian Cabral analyzed Warburg Pincus taking panther X rare from other sponsors.

00:06:43: But the key mechanism there is rolling equity, right?

00:06:46: That's a massive tell.

00:06:47: When a seller rolls their equity it signals to market that next like of growth actually real

00:06:52: Totally aligns incentives.

00:06:54: We're also seeing second areas markets step up absorb this liquidity pressure.

00:06:58: Philip DeVuser notes that the global secondaries market hit a record two hundred and forty billion dollars in twenty-five.

00:07:03: Two hundred and fourty billion, and Ardien's latest secondary fund reached thirty billion dollars making it larger than the biggest traditional buyout fund ever raised.

00:07:11: A huge chunk of that is going into continuation vehicles.

00:07:14: Yeah CVs are everywhere but let me play devil's advocate here.

00:07:18: Are CVS a genuine tool to hold onto trophy assets?

00:07:22: Or our sponsors just playing hot potato with themselves To avoid marking down a bad investment.

00:07:28: That's

00:07:28: the billion dollar question, right?

00:07:30: And Sohail Juma actually addressed this.

00:07:32: The SEC is currently heavily probing how CVs are valued...the valuation risk didn't appear at the transaction.

00:07:39: it appeared years earlier when value creation plans slipped and no one had hard conversation.

00:07:44: Right

00:07:44: regulators want to know that asset is actually durable.

00:07:48: We're also seeing some really niche structural flavor internationally.

00:07:52: Chan Wang-Fei notes, NBOs in Malaysia are heavily shaged by section one twenty three restrictions on financial assistance altering the whole debt package.

00:08:00: Yeah

00:08:00: and Darren Gleaman highlights independent buyouts where owners literally borrow against their own company to buy out a PE partner keeping full proceeds.

00:08:08: highly

00:08:09: aggressive but super adaptable.

00:08:11: But look, whether it's a CV or an independent buyout when deals finally reach the finish line?

00:08:15: The actual mechanics of getting approved due diligence are being radically rewritten by

00:08:19: AI.".

00:08:20: It's incredible!

00:08:21: AI in diligence is like an MRI machine for business...it doesn't heal the patient just exposes every broken bone instantly.

00:08:29: I love that analogy.

00:08:30: And Remo Dosgal brought in a staggering statistic on this, A seven-agent AI system is now compressing what used to be eight weeks of LBO due diligence into just twenty four

00:08:41: hours.

00:08:41: Twenty Four Hours!

00:08:42: That's just wow.

00:08:43: it's running modeling debt sizing and EBITDA normalization all in parallel.

00:08:49: Yep and Michael Lou pointed out This Is an existential threat To outside consultants who traditionally build for that manual repetitive roll forward

00:08:56: work.

00:08:56: But if AI can analyze a company in twenty four hours, what happens?

00:09:00: If the company's own internal data is just to complete mess.

00:09:03: That's the catch.

00:09:04: Matt Metry and Wolf Tone noted that fragmented operating data like mismatched EMR and ERP systems Is totally stalling exits especially in health care.

00:09:12: Yeah The AI just hits an error right.

00:09:14: Exactly outdated tech infrastructure alone Can cut up portfolio companies exit valuation by ten to twenty percent

00:09:20: which brings up a critical distinction from Evan S and Derek C via Tabor J Small.

00:09:26: Buyers are now screening out businesses that haven't integrated AI but they easily spot the difference between surface level AI tools and genuine AI driven workflow changes.

00:09:37: Right, slapping co-pilot licenses on a pitch deck doesn't count.

00:09:40: it has to be embedded workflows that actually impact EBITDA

00:09:44: Real operational alpha.

00:09:45: so we've covered a nine year backlog multiyear exit readiness an AI violently compressing diligence

00:09:52: It's a lot!

00:09:53: And it ties into really provocative thought to wrap things up.

00:09:56: If AI is compressing diligence from months to hours and sponsors are tracking operational alpha in real time over seven-year holds, perhaps the traditional concept of an exit window is totally dead.

00:10:07: Wait like not trying to time a market peak at all?

00:10:10: Exactly!

00:10:11: In the near future exits might be driven by algorithmic triggers that execute a sale the exact moment a company's data proves its operational thesis has been fully realized.

00:10:20: It's definitely something for you to mull over before your next pipeline meeting.

00:10:24: If you enjoyed this episode, new episodes drop every two weeks.

00:10:27: Also check out our other editions on PE value creation private equity fundraising venture capital M&A and strategy in consulting.

00:10:36: Thank you so much for joining us on this deep dive And remember to subscribe So you don't get stuck in the backlog.

00:10:40: See you next time.