Best of LinkedIn: Private Equity: Value Creation CW 32/ 33

00:00:00:

00:00:18: So imagine closing a deal, right?

00:00:20: You pop the champagne with the management team.

00:00:22: And then I don't know, fifteen days later massive chunks of your recurring revenue just quietly walk out the door.

00:00:29: Wait, fifteen days?

00:00:30: Just like

00:00:30: that?!

00:00:30: It's just

00:00:31: like that!

00:00:31: Why??

00:00:32: Because…the departing founder's golf buddy who happens to control a key client account...just decided he'd take his business elsewhere and nobody in your newly acquired company actually knew how this relationship was managed.

00:00:44: Oh

00:00:44: wow….that is

00:00:45: terrifying!!

00:00:47: So today we're looking at why the traditional hundred-day value creation plan is basically dead.

00:00:52: And while you only have a matter of days to save your exit multiple.

00:00:55: Yeah, we are cutting straight to the core of what strategy M&A and investment professionals or fighting through right now.

00:01:03: Because if you're building a value creation plan in today's market um...the rules have shifted entirely underneath you.

00:01:11: Oh absolutely!

00:01:11: The era of pure financial engineering is over.

00:01:14: You know buying well throwing cheap debt at the asset riding the market multiple up.

00:01:19: that's done

00:01:19: Right.

00:01:20: So our mission for this deep dive is to cut through the fluff.

00:01:24: We're looking at the top private equity insights across LinkedIn, To understand how actual operational value creation Is taking over and why some of The most sophisticated sponsors are actually destroying their own enterprise value

00:01:38: And to understand that shift we really have to look At the macro reality first because That dictates everything else.

00:01:43: I mean were seeing average hold periods stretch out significantly.

00:01:46: Yeah!

00:01:46: Some data shows Were hitting roughly six Six years now.

00:01:50: Okay, which is huge

00:01:51: exactly.

00:01:52: Alex sec recently framed this perfectly.

00:01:54: He said the multiple used to carry the whole investment case right?

00:01:57: The operation just had two will not break

00:01:59: great.

00:01:59: Just keep the lights on you're fine

00:02:01: Yeah But with expensive debt and no multiple expansion to bail You out the operation itself has to manufacture the return.

00:02:09: And that Is exposing a severe capability gap across the industry Right Now

00:02:13: because Firms have these world-class machines for sourcing and underwriting, but their actual operating capacity just hasn't kept up.

00:02:21: Like slide four of the ICDEC always says operational improvement in bold...

00:02:25: Right!

00:02:26: Always

00:02:26: But very rarely does anyone actually staff that slide with real operators.

00:02:30: And The math on why this matters is just brutal.

00:02:34: John Kelleher broke down the mathematics of execution speed comparing the corporate rhythm to the private equity.

00:02:40: I saw that Yeah.

00:02:41: It's fascinating, because corporate teams typically operate on like a monthly or quarterly cycle?

00:02:46: Exactly!

00:02:47: They review the quarter they find a variance and then they spend the entire next quarter trying to adjust which is agonizingly slow

00:02:53: it really is.

00:02:54: And Kelleher argues that private equity has to force a weekly execution cadence.

00:03:00: and its not just some philosophical difference Its literal mathematical compounding.

00:03:04: Break that down for us.

00:03:05: how does math work?

00:03:06: So if you improve productivity by just two percent every execution cycle, a corporate team operating quarterly gets roughly a one point zero eight times boost over the year.

00:03:17: But it's time to operate on weekly cadence.

00:03:20: that two percent compounds into a two-point eight times productivity improvement.

00:03:26: Two point eight?

00:03:27: That is massive difference in just one.

00:03:30: But I mean practically speaking you can't just tell a mid-market manufacturing company Hey, we do everything weekly now without burning the staff to the ground

00:03:38: right?

00:03:38: Right.

00:03:38: A weaker cadence doesn't mean doing three months of strategic work in five days.

00:03:43: It just means breaking down variants into micro corrections.

00:03:46: You're steering this ship by making one degree turns every day rather than checking the compass every three months and realizing your totally lost

00:03:53: Makes sense.

00:03:54: So financial engineering used to be the engine of a car, and operations was just the fresh coat-of-paint to sell it.

00:04:00: now The paint job is completely irrelevant.

00:04:02: if the transmission shot

00:04:04: exactly.

00:04:05: that Is a perfect way?

00:04:06: To look at you are shortening the time between A decision in the data feedback And You have to operate That fast because post close you simply do not Have the Time you think you Do

00:04:15: which Goes back to the Hundred day plan being broken?

00:04:18: Yes, Gord Reynolds pointed this out brilliantly.

00:04:21: The industry treats the first hundred days as this honeymoon period right.

00:04:26: slowly assess culture build relationships draft a plan.

00:04:30: Reynolds argues you actually get about fifteen days before the institutional memory starts evaporating.

00:04:35: ah so that ties right back to the golf buddy scenario we opened with yep.

00:04:39: the financial model assumes all the institutional knowledge you know, how pricing is negotiated who holds the key accounts.

00:04:46: Is neatly categorized in a CRM but it almost never is

00:04:49: right?

00:04:50: It lives entirely in the founder's head or In these informal social contracts.

00:04:54: and if you don't extract that knowledge immediately chaotic growth turns into active revenue churn before The press releases even out

00:05:01: exactly.

00:05:02: And it's not just about playing defense.

00:05:04: That urgency is where the massive value on locks are hiding especially in the lower middle market.

00:05:10: Dr.

00:05:10: Sasha Hagen-Mehler shared a phenomenal example of this.

00:05:13: What an

00:05:13: awesome pricing exercise, I loved it!

00:05:16: He stepped into small cap mandate and brought in basic pricing exercises.

00:05:20: And literally within fifteen minutes he discovered that thirty percent of the company's customers were being supplied below cost.

00:05:27: Wait...thirty percent?

00:05:28: Supplied Below

00:05:29: Cost?!

00:05:29: How does a company even survive that?

00:05:31: Well you have to understand how that happens.

00:05:33: with founder led business It is rarely math error or inflation error.

00:05:38: A Founder sets price Ten years ago, based on a handshake right?

00:05:41: Okay.

00:05:42: Over decade the cost of raw materials labor freight it all slowly creeps up.

00:05:47: but because pricing is managed through loyalty rather than dynamic model they never indexed the Kujis.

00:05:54: They just eat them.

00:05:54: margin erosion Wow!

00:05:57: So they were quietly subsidizing third their client base and take away here for you listening.

00:06:02: when apply basic weekly structure to fix an area like that You aren't making incremental improvement.

00:06:08: No, not at all.

00:06:09: You're fundamentally rebuilding the margin profile in a single move?

00:06:13: I mean Hagen-Mueller's fifteen minute spreadsheet exercise.

00:06:16: probably added more enterprise value than six months of debt restructuring

00:06:20: without a doubt.

00:06:21: But here is the immediate roadblock to that execution speed.

00:06:25: you cannot pull those levers if The person driving the change has to ask for permission For every single dollar

00:06:31: right which completely changes how we view the C-suite.

00:06:34: If you want a weekly execution engine, You need to power structure designed to handle it and this is where traditional PE model often chokes.

00:06:43: Yeah, Lee McCabe recently highlighted his dysfunction with operating partners.

00:06:47: He argues that if an operating partner doesn't have true structural authority they're fundamentally useless To value creation plan.

00:06:53: And by structural authority We mean a board seat and explicit budget control for at least The first hundred days.

00:06:59: right because sponsors had This bad habit of just Hiring an impressive biography.

00:07:04: It's exactly.

00:07:04: they bring in someone with thirty years of consulting experience and assume the management team will just defer to their wisdom.

00:07:10: Yeah, but authority post-close isn't biographical it's structural.

00:07:16: so if they can override The CEO there stuck

00:07:19: right?

00:07:20: If they can't pivot the pricing strategy because the original deal memo said pricing was fine They aren't an operator They are just a really expensive consultant producing PowerPoint decks that go straight in the bin.

00:07:31: Yeah, they need the authority to speak for The Sponsor without going back To the investment committee every Tuesday which forces A massive psychological shift In the boardroom itself.

00:07:41: Okably

00:07:41: Mark Janssen had a fantastic perspective on how this Impacts the CFO specifically because in a corporate environment a Board meeting is basically theater.

00:07:50: right it's polished.

00:07:52: you bury the bad news and appendix see And highlight the wins.

00:07:55: But a private equity board meeting cannot be a performance.

00:07:59: Janssen says it has to be an autopsy of the last thirty days and a tactical strategy session for next ninety.

00:08:04: Because,

00:08:05: The Partners already read the flash reports.

00:08:07: They don't want a sixty-slide narrative

00:08:09: Exactly!

00:08:10: they wanna know precisely what is broken And more importantly how fast CFO was fixing It.

00:08:16: In normal corporate setting variance is punished.

00:08:19: You miss target.

00:08:20: your bonus takes ahead

00:08:21: but in private equity hidden variances fatal.

00:08:24: Yes If gross margins are slipping due to freight costs, the CFO needs psychological safety and courage to put those red flags right on slide two.

00:08:34: Here is the compression.

00:08:35: here are the levers we pulled this week.

00:08:39: Stop managing the optics and start managing the variants.

00:08:41: I love that, And speaking of optics before we move on if you're finding this breakdown useful for your own practice Take a second hit.

00:08:49: subscribe so don't miss our future deep dives.

00:08:51: We regularly unpack these friction points

00:08:54: definitely actually touching on the friction caused by optics.

00:08:57: kit Lyle recently warned about it.

00:08:59: dynamic operators whisper About constantly.

00:09:02: he said The branding of founder-friendly PE is Actually highly dangerous.

00:09:05: I found that fascinating because literally every firm markets themselves as founder-friendly now.

00:09:10: It's like the ultimate differentiator, why is it dangerous?

00:09:13: Because it masks a massive abrupt shift in accountability.

00:09:18: When a founder is running a business from zero to thirty million... ...it's a benevolent dictatorship.

00:09:23: Decisions are made on the hallway.

00:09:25: Right

00:09:25: culture is just based on personal loyalty

00:09:27: Exactly.

00:09:28: But the moment that wire transfer clears they're reporting to a board That just bought a highly leveraged Future version of the company that doesn't actually exist yet.

00:09:37: Wow, yeah.

00:09:39: So the founder-friendly posture persists as a social contract.

00:09:42: But the legal and financial reality has totally changed.

00:09:46: And if you don't name that gap on day one You get massive friction by Day forty five.

00:09:50: right

00:09:50: because management thinks they have autonomy?

00:09:52: The board gets frustrated at the weekly cadence isn't happening which leads directly to a really counter-intuitive insight from Brady Harris.

00:10:00: Oh, about where value is destroyed?

00:10:02: Yes he's been leading PE backed businesses for decades and He argues the greatest destruction of enterprise value doesn't come from competitors or macro tech shifts.

00:10:13: It comes directly from the boardroom itself.

00:10:15: that as a bold claim

00:10:16: it Is.

00:10:17: but the mechanics make sense.

00:10:20: A deal gets underwritten on certain assumptions growth rates margins But when reality proves the assumptions wrong, The board blames operating leadership for missing targets rather than fixing the thesis.

00:10:33: Right...the model is flawless so that execution must be poor.

00:10:37: and you have these junior deal leads on the Board who can build a pristine DCF model in their sleep.

00:10:43: but they've never operated a company through supply chains.

00:10:45: shock

00:10:46: Exactly!

00:10:46: So they manage entirely via spreadsheet And that destroys trust.

00:10:51: When operators feel managed by a spreadsheet instead of supported as a partner, they start taking risks.

00:10:55: They just revert to theatrics.

00:10:56: They're

00:10:57: managing the board Instead Of The Business.

00:10:58: Yep!

00:10:59: The best executives quietly update their resumes and leave Speed drops To zero And the Board suffocates the very value that you are installed to protect.

00:11:07: So let me ask You A sharp question here.

00:11:09: We spend an enormous amount of time assessing C-suite readiness Right?

00:11:13: Psychological profiles on the CEO grading the CFO.

00:11:17: But if the boardroom is destroying value, who audits the Board?

00:11:21: Are we massively overindexing on management readiness when we should be assessing sponsor

00:11:26: readiness?".

00:11:26: I mean that's arguably a defining question of this era in private equity.

00:11:30: Sponsors are terrible at assessing their own operational governance – they just don't have a mirror!

00:11:35: And nowhere does this disconnect more obvious than how PE is handling artificial intelligence right now…

00:11:42: The great AI pilot purgatory.

00:11:44: Let's get into it because this perfectly mirrors the dysfunction we just talked about!

00:12:03: Because just telling the CTO to make sure everyone is using co-pilot, it's not a strategy.

00:12:09: That's buying SaaS licenses.

00:12:11: Treating AI as real capability means looking at unit economics—where labor actually consumed?

00:12:17: But sponsors don't want that deep workflow analysis.

00:12:20: Aaron G pointed out private equity always defaults back off its cost cuts Because that's the easiest thing for a deal team to model in a spreadsheet.

00:12:29: Right, so The Playbook is just let's save fifty grand and headcount here maybe one hundred grand there.

00:12:34: but For a mid-market manufacturing business those numbers are rounding errors.

00:12:39: saving One FTE and finance does nothing for the exit story

00:12:43: Nothing at all.

00:12:43: you cannot cost.

00:12:44: cut your way To a premium valuation with AI what actually changes?

00:12:48: The exit story Is using AI to build proprietary IP and plug revenue lineage.

00:12:53: Give me an example of that.

00:12:54: How does it look in practice?

00:12:56: Well, Aaron gave a great example of the manufacturing business.

00:12:58: their normal process for answering an RFP took two to three weeks because sales had to pull specs from old SAP system cross-reference pricing and Salesforce and dig through shared drives

00:13:08: all while they're offshore.

00:13:09: competitors are quoting exact same job in three days.

00:13:13: exactly when you take Three Weeks to quote You were leaking anywhere from five to twenty percent potential revenue on deals.

00:13:21: The buyer has already moved on.

00:13:23: Right

00:13:23: But if you use AI to instantly synthesize that SAP data, the Salesforce data and historical contracts You aren't replacing this salesperson!

00:13:33: Your compressing the quoting cycle from weeks today's.

00:13:36: See it sounds like putting a Ferrari engine in a horse-drawn carriage If you don't redesign the chassis of actual workflows or the data layer your just gonna crash faster.

00:13:46: Why are sponsors so obsessed with these pilots?

00:13:50: because of exactly what Karsten W highlighted.

00:13:52: He shared a brutal statistic, right now, eighty-eight percent of portfolio companies are increasing their AI investment but only six percent have actually redesigned how work gets done.

00:14:03: Wow!

00:14:03: Eighty

00:14:03: eight versus six percent?

00:14:05: It's literally like trying to automate a hoarder house.

00:14:07: you don't need a robot to sort the junk ten percent faster.

00:14:10: You need to throw out the junk and redesign the floor plan.

00:14:13: Karsten describes it as dragging.

00:14:16: If the data foundation is broken, you are just burning cash.

00:14:20: You have to clean the data environment first then

00:14:23: automate.".

00:14:24: And this brings us to Brannick-Gill's framework which encapsulates this perfectly.

00:14:29: He divides it into enablement versus reinvention.

00:14:32: Most portfolio companies are stuck in enablement Just giving employees tools to do manual jobs a little faster

00:14:39: Which creates marginal value but does nothing to enterprise multiple Right.

00:14:43: Real value is reinvention, it requires asking.

00:14:46: if we built this business function from scratch today with AI agents available what would the architecture look like?

00:14:52: The goal isn't making the workflow twenty percent faster...the goal is making it disappear

00:14:57: entirely.".

00:14:58: And that's a question sponsors should be forcing at the hundred-day mark.

00:15:02: If the AI implementation hasn't fundamentally changed the unit economics you are just measuring activity not value creation.

00:15:09: Okay, so bringing all these threads together for you listening.

00:15:13: If you are steering a value creation plan today the landscape demands a radically different mindset.

00:15:18: it's no longer about corporate theater or writing multiple expansion.

00:15:22: It requires ruthless execution speed structural authority for operating partners and an approach to AI that actually reinvents workflows.

00:15:30: Its complete industry maturation.

00:15:32: The firms that figure out how to rewire their boardrooms To support operators are the only ones going to realize their investment thesis in this environment.

00:15:41: Which leaves us with a really provocative thought to mull over, if AI's greatest value right now is plugging revenue leakage and accelerating speed like answering those RFPs in three days what happens to competitive advantage when every PE firm successfully implements this?

00:15:57: Does operational speed just become the new baseline table stakes forcing the industry right back?

00:16:04: It's a fascinating paradox.

00:16:06: The more ubiquitous the technology becomes, the more of the raw human element—the ability to assess risk and inspire people actually

00:16:33: dictates.