Best of LinkedIn: Private Equity: Exit Strategies CW 32/ 33

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

00:00:05: Exit strategies insights in calendar weeks thirty-two and thirty three.

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

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

00:00:19: And I think it's important to set expectations right up front.

00:00:21: today We are breaking down very specific sets of trends that frankly Dominating the professional conversations on LinkedIn right now.

00:00:30: Yeah, because the old private equity model of just you know high-speed buying tuning up The asset and flipping it in three to five years that velocity is completely stall

00:00:39: don't really stalled out Right.

00:00:40: so our mission today is to dig into this massive growing backlog of unsold assets Look at how secondaries are stepping in as kind of this core infrastructure And then get into the brutal reality of exit readiness Today

00:00:53: which is not pretty.

00:00:55: no yeah It's not.

00:00:56: and finally we'll look how the actual structure of who shares in these exits is fundamentally shifting.

00:01:02: Yeah, and I want to start right with that macro problem because it defines literally everything else.

00:01:06: we're gonna talk about the sheer volume of companies That are just stuck.

00:01:10: Right now.

00:01:11: yeah It's like a massive highway traffic jam, right?

00:01:14: No one is taking the off-ramp And Bain shared this staggering math recently.

00:01:18: they're counting roughly thirty two thousand unsold PE portfolio Companies.

00:01:24: oh wow

00:01:24: yeah representing about three point eight trillion dollars in value which uh To put that in perspective, That's an eleven X inventory to exit ratio.

00:01:34: And the historical norm is what like seven x

00:01:36: exactly?

00:01:37: Seven x. so we are way beyond normal capacity.

00:01:40: and Steve Kitsalka actually pointed out that if you look just at The US unsullied companies alone hit thirteen thousand three hundred and twenty

00:01:48: five.

00:01:48: That Is a staggering bottleneck and the arithmetic on clearing it It's pretty sobering.

00:01:53: Richard Tobin ran the numbers On this okay and he noted that If You Look At That Thirty Two Thousand Number And you exclude sponsor-to-sponsor sales.

00:01:59: Right, so just PE selling to PE?

00:02:02: Exactly which doesn't actually return net capital into the limited partners anyway right if You look at the real clearing rate Tobin's math implies it could take over twenty two years To work through this backlog.

00:02:12: wait twenty two Years yes I mean assuming they just stopped buying today.

00:02:16: right Which obviously isn't happening.

00:02:18: and meanwhile The cash buyers who are out there, they're heavily discounting these age assets.

00:02:23: We're talking discounts of fifteen to twenty seven percent.

00:02:27: Wow!

00:02:27: So taking a huge haircut But I mean if the broader M&A market actually had up pretty record year recently.

00:02:34: Why are these specific PE assets just sitting there?

00:02:37: Yeah, that's

00:02:37: the core question.

00:02:38: Right and Mustafa Siddiqi actually hit on this.

00:02:41: he pointed out The zombie funds now hold about three hundred fifty billion dollars a

00:02:45: third of a trillion dollars

00:02:47: exactly because it's not A broken M&A market It's just a brutal pricing reality check.

00:02:51: Oh

00:02:52: I see

00:02:52: right.

00:02:53: These funds bought at those crazy inflated twenty-twenty one prices when debt was basically free.

00:02:59: And buyers today with the current cost of capital, they simply will not pay those peak multiples.

00:03:04: So they're just refusing to accept the markdown?

00:03:06: They are sitting on it.

00:03:07: Exactly!

00:03:08: They won't take their head off their internal marks.

00:03:10: But...the operational costs of just sitting on an asset I mean..it's not financial right?

00:03:15: No absolutely not.

00:03:16: Alex Eck brought this up and i found really compelling.

00:03:19: He talked about human element The team burnout.

00:03:22: Oh yeah

00:03:23: Because you acquire a company, and give the management team a five-year plan.

00:03:28: You say hey we're gonna sprint to the exit!

00:03:31: Right work super hard for a massive payout.

00:03:33: Exactly.

00:03:34: but when year five becomes your seven And then Year eight that Sprint turns into this exhausting unsustainable operating model.

00:03:44: Yeah can't sprint marathon?

00:03:46: The team just burns out.

00:03:47: They get frustrated.

00:03:48: The finish line keeps moving and

00:03:50: when those key executives start to check out the underlying value you were trying To build actually starts to erode exactly

00:03:57: although, to be fair Calvin Kreetz did push back on this a bit with some interesting data.

00:04:01: What does

00:04:02: he find?

00:04:02: He showed that long holds aren't inherently bad if it's strategic.

00:04:07: like he pointed to sponsors Like HG and h&f they deliberately let their winners compound.

00:04:13: so If you look at a company like action They saw a sixty-two X enterprise value growth over a fifteen year hold.

00:04:20: Wow, sixty two X. but that's high conviction platform right?

00:04:24: A deliberate buy and build strategy?

00:04:26: Exactly they're continually bolting on new acquisitions.

00:04:29: But for the vast majority of these thirty two thousand stuff companies it is not a strategic

00:04:36: hold.

00:04:37: No there stuck

00:04:38: Right.

00:04:38: And they desperately need a pressure valve to return cash their LPs,

00:04:42: which is exactly why the secondary market?

00:04:43: it's just exploding right now because traditional exits are clogged.

00:04:47: secondaries you're stepping in and there no longer does this niche work around.

00:04:51: Jeffries reported that The global Secondary Market hit A record one hundred and eighteen billion dollars In the first half of twenty twenty six.

00:04:59: That is massive volume.

00:05:01: It is, and Michael Sidgemore highlighted a comment from Evercore's Nigel Dawn who flat out calls secondaries core market infrastructure now.

00:05:08: Core infrastructure?

00:05:08: It's maturing the private markets.

00:05:10: it's not a clearance bin anymore

00:05:12: Right!

00:05:12: Its an active management tool.

00:05:13: And hey by the way if you guys are finding this deep dive useful make sure to hit that subscribe button so we don't miss our future additions.

00:05:20: Absolutely So.

00:05:21: within that infrastructure The biggest boom happening in GP led continuation vehicles or CVs.

00:05:28: Okay yes

00:05:29: That specific segment grew to one hundred and six billion dollars.

00:05:34: Okay, so wait a continuation vehicle.

00:05:36: let's make sure we're totally clear on this that when the GP private equity firm basically sets up new fund moves their own stock asset into it and tells investors you can cash out or roll over.

00:05:49: Right, that's exactly it.

00:05:50: they buy the asset from themselves essentially.

00:05:52: See I have to raise a flag there because Camilla Malina nice and posted about this And its huge conflict of interest.

00:05:58: Oh completely

00:05:59: right.

00:06:00: if The GP is both the seller and the buyer Of the asset who's protecting?

00:06:04: The price?

00:06:05: how did the LPs know They aren't getting fleeced?

00:06:08: they don't always.

00:06:10: and That exact Conflict of Interest Is why There is now A new sec investigation Into These Vehicles.

00:06:15: oh wow the SEC Is stepping in.

00:06:17: yeah

00:06:18: The regulatory scrutiny is definitely catching up because the pricing mechanics are just too opaque right now.

00:06:23: Yeah, that makes sense.

00:06:25: and beyond the regulatory risk There's a huge operational

00:06:27: risk.

00:06:29: James O'Dowd brought up this granular warning about liquidity traps specifically for professional services firms in these CVs.

00:06:37: Okay

00:06:37: How does that work?

00:06:38: So think about a law firm or an accounting firm.

00:06:41: the value Is entirely in the human capital right.

00:06:43: right.

00:06:44: the partners their client books.

00:06:45: exactly.

00:06:46: so partner rolls their equity into a new CV, thinking they'll get paid out eventually.

00:06:52: But they're told hey it's gonna be another five to seven years.

00:06:55: Oh man if there already burned-out...

00:06:57: Exactly!

00:06:58: If that frustrated rainmaker decides just leave and go to a competitor They take their clients with them

00:07:03: Which tanks the value of the firm

00:07:05: Right which means the rollover equity for everyone else who stayed behind.

00:07:08: Just lost value.

00:07:10: So then next partner panics & leaves.

00:07:13: He becomes downward spiral.

00:07:14: That is brutal.

00:07:16: So continuation vehicles have all these hidden traps, which means if secondaries or CVs aren't a clean option You really just have to achieve the traditional M&A exit today

00:07:26: you do

00:07:27: but To do that in this market.

00:07:29: You have to be impendaculately prepared like long before a buyer even knocks on the door.

00:07:34: Yeah The timeline for exit readiness has totally shifted.

00:07:37: yeah.

00:07:38: Nicholas Metzkin shared this EY Global PE Exit Readiness Study.

00:07:42: what did

00:07:42: it say?

00:07:43: Eighty-six percent of GPs say that extensive preparation materially improves their valuations.

00:07:49: I mean, does it make sense?

00:07:50: It does but the kicker is that it must start twelve to twenty four months out.

00:07:54: Wow

00:07:55: two years out!

00:07:56: Yeah you can't just slap a deck together in six months anymore.

00:07:58: No and its crazy.

00:07:59: because Phil Scott shared this stat blew my mind, he said nearly sixty percent of UK owner-managed businesses under twenty million pounds go into a sale without a finance director.

00:08:10: Sixty

00:08:10: percent that's insane!

00:08:11: Literally

00:08:12: more than half.

00:08:12: they don't even have a dedicated finance leader.

00:08:14: it's like trying to sell a house while you're still pouring the concrete foundation

00:08:18: right?

00:08:18: The buyer is just gonna walk away or drastically discounted price

00:08:21: exactly and when they do hire?

00:08:24: CFO Eric Fugoli pointed out these PE backed CFOs often only last two years.

00:08:31: Why so short?

00:08:32: Just burnout.

00:08:33: Burnout, yeah because they get completely overloaded with just closing the historical books.

00:08:37: They're managing cash flow audits The board...they have zero time for forward-looking strategic forecasting

00:08:44: Right!

00:08:44: The FPNA stuff that buyers actually want to see.

00:08:46: Exactly So.

00:08:48: Daryl Bates Brownsword looked at this and noted That the average business sellability score right now is a dismal Fifty-four percent.

00:08:55: Ouch,

00:08:56: right.

00:08:57: and when buyers see that low score They don't give you a clean cash exit.

00:09:01: they push sellers heavily into earnouts.

00:09:03: Oh yeah.

00:09:04: So they're deferring the risk back onto the seller

00:09:06: totally?

00:09:06: There's saying prove it prove The revenue is real And maybe we'll get paid in three years.

00:09:11: and buyers are getting so sharp at spotting the BS Right now.

00:09:15: Do you know?

00:09:15: Michelle talked about this concept of the retrofitted exit narrative.

00:09:18: retrofited meaning they just make It up at the end.

00:09:21: essentially Yeah.

00:09:24: They claim three x revenue growth.

00:09:26: They claim they expanded margins by six hundred basis points.

00:09:29: Sounds great on paper

00:09:30: right, but then the buyers Gilligan's team digs in and they find out that all that revenue growth It just came from messy add-on acquisitions That are still running on different IT systems.

00:09:41: Oh

00:09:41: man a total integration nightmare

00:09:43: exactly.

00:09:44: And the margin expansion?

00:09:45: it wasn't some brilliant operational shift?

00:09:47: It was just one time renegotiation with this supplier.

00:09:50: so

00:09:50: its not repeatable.

00:09:51: no Buyer see right through it now.

00:09:53: Which is why you have to do the unsexy stuff.

00:09:56: Brian Dukes actually posted this ninety day checklist.

00:09:58: that sounds so basic, but its vital.

00:10:01: What's on?

00:10:02: Things like making sure every single employee has a signed employment agreement getting all your client agreements Actually countersigned.

00:10:09: It's

00:10:09: amazing how many companies miss them.

00:10:11: Yeah A buyer's legal team will absolutely use an unsigned contract To shave millions off of purchase price.

00:10:17: Exactly and Dukess also stresses honest, twenty-twenty seven forecasting.

00:10:22: Like don't project twenty percent growth if you completely missed your numbers the last two years.

00:10:28: be honest about your friction points

00:10:30: because the buyer is going to find them anyway.

00:10:31: they

00:10:31: will always fine.

00:10:32: yeah.

00:10:33: so let's say a company does all of this right?

00:10:36: They survive.

00:10:41: What does the finish line actually look like in twenty-twenty six?

00:10:44: Yeah, that's a big question because the actual structure of these transactions is fundamentally shifting.

00:10:49: Right they're taking on massive new scales.

00:10:51: Joshua Yip did a breakdown of that huge fifty five billion dollar electronic art steal.

00:10:56: The

00:10:57: EA take private yeah...the

00:10:58: largest LBO on record.

00:11:00: but what's fascinating how it was funded with interest rates where they are.

00:11:03: you can't just pile cheap debt onto a fifty five million dollar deal anymore.

00:11:06: No!

00:11:07: The mouse doesn't work.

00:11:08: Exactly so.

00:11:08: he was backed heavily by sovereign equity.

00:11:11: Saudi Arabia's PIS came in alongside Silver Lakes.

00:11:13: Wow, so sovereign wealth is stepping as the new equity anchor because they're only ones with pockets that deep?

00:11:19: Precisely They are reshaping the very top end of the market.

00:11:23: That's fascinating at the macro level, but what I find really interesting is how equity has been distributed internally.

00:11:29: down-the-work chart

00:11:30: yeah.

00:11:30: Felix Lay and Travis Rose posted about Blackstone.

00:11:34: seven billion dollar IPO of Jersey Mike's

00:11:38: sandwich chain.

00:11:38: Yeah normally right.

00:11:40: in a traditional PE exit maybe less than one percent of the workforce shares on the upside.

00:11:45: just The C suite

00:11:46: Right.

00:11:47: The founders and the top execs get rich, and as shift managers gets a pat on their back

00:11:51: Exactly!

00:11:52: But Blackstone is tying employee bonuses ranging from zero to two hundred percent directly to deal returns.

00:11:59: Wow for frontline workers

00:12:01: Yes For broad employees base.

00:12:03: They're completely challenging that old model.

00:12:05: And they are doing it because drives insane operational efficiency.

00:12:08: If store manager has skin in game Retention goes up Waste goes down.

00:12:13: Margin's improve.

00:12:14: That expands exit multiple way more than what the bonus pool cost them.

00:12:18: Exactly, it's not just a nice HR thing its hardcore commercial strategy now

00:12:22: which is such a massive shift in incentives.

00:12:26: and we're also seeing entirely traditional sectors being transformed by these PE exits

00:12:31: like what?

00:12:31: Well Rob Brown noted the accounting profession.

00:12:34: Oh

00:12:34: accounting yeah that's been wild lately.

00:12:37: It's completely

00:12:37: changing.

00:12:38: private equity now holds stakes In about half of top thirty US accounting firms

00:12:43: Half at the Top Thirty Yes

00:12:45: And we're seeing acquisition multiples in that space climb from, you know maybe eight X up to fourteen X. That

00:12:52: is a massive jump for professional services firm

00:12:55: it Is.

00:12:56: and what's driving?

00:12:56: It is that We are now seeing second buyouts In the Space like Citroen Cooperman moving To Blackstone.

00:13:01: okay so PE firms sells to A bigger PE Firm.

00:13:04: exactly when that happens The playbook Shifts.

00:13:08: The first PE firm might have invested in growth and technology, but the second buyer coming into fourteen X. they have to optimize margins aggressively.

00:13:16: To make their own math work

00:13:18: which means that actual clients of those accounting firms are probably going see some disruption changing teams different fee structures

00:13:24: exactly pressure trickles all way down.

00:13:27: Wow, I mean we've covered a ton of ground today from the thirty two thousand backlog to sovereign wealth backing fifty five billion dollar deals.

00:13:36: Yeah it's a lot to process

00:13:38: It really is.

00:13:39: So as we wrap up what's our final thought here?

00:13:42: Something that maybe haven't touched on yet but these professionals need thinking about.

00:13:46: regarding this extended timeline

00:13:48: Yes so Here Is The Provocative Thought i'd Leave Everyone With.

00:13:52: If hold periods are naturally stretching towards decade Because of this backlog, right?

00:13:57: How is the rapid advancement of AI going to completely rewrite the terminal value of these aging assets before they ever reach an exit window.

00:14:06: Oh wow!

00:14:06: Right I mean if you're holding a traditional business services firm or legacy software platform for nine years You have to ask yourself Is our buy and hold strategy accidentally gonna turn into buying become obsolete?

00:14:18: That

00:14:18: is a terrifying thought for a GP sitting on a ten-year old asset right now.

00:14:22: It really is!

00:14:23: The terminal value math is changing right under their feet.

00:14:26: If you enjoyed this episode, new episodes drop every two weeks.

00:14:29: Also check out our other editions on PE Value Creation Private Equity Fundraising Venture Capital M&A and Strategy & Consulting.

00:14:38: Thank You so much for listening today And don't forget to hit that subscribe button.

00:14:42: So stay ahead of the curve in all these shifting dynamics.