Best of LinkedIn: Private Equity: Value Creation CW 34/ 35

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

00:00:06: Value creation in calendar weeks thirty-four and thirty five.

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

00:00:17: you can find more info

00:00:19: And for those of you joining us today, we are going to be giving you a very focused totally no fluff breakdown.

00:00:25: Of the top private equity insights were seeing trend across LinkedIn right now.

00:00:30: exactly

00:00:30: so if your in strategy M&A or investments.

00:00:34: this deep dive is specifically tailored.

00:00:37: Right, because we are looking at this massive shift happening in the industry today.

00:00:41: The whole center of gravity and private equity is.

00:00:43: it's moving completely away from the deal itself.

00:00:45: Yeah...the

00:00:45: actual signing

00:00:46: Exactly!

00:00:47: It's heavily moving toward post-signing execution And real operations

00:00:51: Which is fascinating right?

00:00:52: Because I mean if you start with a macro landscape You really start to see why This center of gravies shifting so violently.

00:00:58: Oh absolutely..The data just undeniable.

00:01:00: At that point

00:01:01: Right....the old ways generating returns Are basically losing their edge.

00:01:05: Look at these striking data Alvarez and Marsol just put out.

00:01:08: Yeah, that report was everywhere.

00:01:10: It really was And they pointed out that operations now drive forty seven percent of buyout value creation

00:01:16: which is huge.

00:01:18: it Is because ends up from just twenty five percent not that long ago?

00:01:22: At the same time The share From pure financial engineering has Just plummeted.

00:01:27: yeah drop from fifty one percent.

00:01:28: I mean That is a total inversion Of the model

00:01:30: it Really is.

00:01:31: it makes me think well this like buying A company used to be Like flipping a house

00:01:36: You know?

00:01:36: Oh, that's a good way to look at it.

00:01:37: Yeah like you buy the house slap on a fresh coat of paint which is your financial engineering and then you just flip into the next buyer for a profit

00:01:44: right relying On The Market To Just Lift The Price For You.

00:01:47: Exactly.

00:01:48: but today It'S not A House Flip Anymore.

00:01:52: Its Like Buying A Complex Factory That You Actually Have To Get Inside Of Run Maintain And You Know Aggressively Optimize

00:02:00: Because The Value Is Built Or Destroyed After The Wire Clears.

00:02:04: Now not during the price negotiation.

00:02:06: Exactly, and that shift is completely changing how capital flows isn't it?

00:02:11: Oh

00:02:11: fundamentally I mean Adam Street Partners recently found that seventy-two percent of LPs are now favoring the middle market over mega buyouts.

00:02:19: Wow!

00:02:20: Seventy two percent Yeah.

00:02:21: And its specifically because this need for operational value creation.

00:02:26: You can just squeeze a massive heavily optimized mega cap company For that kind of operational juice anymore.

00:02:33: Right they're already running too lean

00:02:34: Exactly.

00:02:35: But the middle market still has all this room to physically improve the unit economics,

00:02:40: which you have to do because of the timeline.

00:02:42: KPMG had a great insight on that recently noting that exits are just taking longer across-the board right now

00:02:48: for sure.

00:02:48: The holding periods or stretching out?

00:02:50: Right

00:02:50: and when we're holding an asset longer those raw paper valuations start To mean less and less to investors.

00:02:56: they

00:02:56: mean almost nothing.

00:02:57: LPs want raw cash generation.

00:02:59: Yeah DPI

00:03:00: exactly distributed to paid in capital.

00:03:04: If you aren't operationally throwing off cash, it doesn't matter what the spreadsheet says your company is worth.

00:03:10: Right which puts an insane amount of pressure immediately on a post-acquisition integration phase.

00:03:15: Oh

00:03:15: day one!

00:03:16: The pressure starts on Day One

00:03:18: Because if operations are new engine Then your integration playbook has to be flawless.

00:03:23: Okay, but I mean why do so many of these post acquisition plans just completely fall apart?

00:03:29: Well

00:03:29: the sources point to a really harsh reality about The classic one hundred day plan.

00:03:34: Yeah We see this all the time.

00:03:35: most These One Hundred Day Plans fail because they're Just.

00:03:39: They're Basically High-Level Strategy Documents.

00:03:41: Right

00:03:42: Exactly.

00:03:42: They aren't Operating Contracts

00:03:44: right.

00:03:45: They lack real owners for the initiatives, and more importantly they don't have actual budgets attached to them.

00:03:50: And if there's no budget it is not a real plan its just a wish list which why the smartest firms are moving toward this concept of The Third Company.

00:03:58: Oh

00:03:59: right!

00:03:59: The third company model.

00:04:00: Let us unpack that.

00:04:01: Yeah, so basically the strongest integrations don't just take the acquired business and try to aggressively absorb it into their existing platform.

00:04:09: Instead they treat the acquired.

00:04:20: Yeah, they're building shared capabilities across the entire portfolio too.

00:04:23: Exactly talent pricing software procurement.

00:04:27: that's becoming a much bigger differentiator than just being good at picking deals.

00:04:31: but

00:04:31: wait let me push back on That third company idea for a second.

00:04:35: if you treat a newly acquired Company Just as raw material don't you risk destroying?

00:04:40: The unique culture or You know the institutional knowledge that made them attractive in the first place?

00:04:46: It's a fair question, and it is huge risk if you do wrong.

00:04:49: But the key is focusing on culture agnostic operational levers.

00:04:53: Okay what an example of cultural agnestic lever?

00:04:55: So one of the posters broke down this great example in offshore model that was rolled out across thirty-one different portfolio companies.

00:05:03: Wow!

00:05:04: And they basically centralized back office delivered one point eight million dollars.

00:05:09: immediate savings kept at ninety two percent retention rate drove three to five percent EBITDA gain.

00:05:15: Well,

00:05:16: and how long?

00:05:17: Just eight months.

00:05:18: that's incredible

00:05:19: right.

00:05:19: And you aren't messing with the targets culture.

00:05:21: when you just centralize accounts payable You're just fixing the plumbing

00:05:25: Right.

00:05:25: another hidden lever I saw mentioned was reviewing PEO relationships.

00:05:30: So professional employer organizations

00:05:32: Oh yeah The HR side Yeah.

00:05:34: if you look at that portfolio wide you can surface so much invisible renewal exposure.

00:05:41: aggregate it from massive cost savings without touching the culture.

00:05:44: Exactly!

00:05:45: But, you know this infrastructure stuff gets super dangerous when we get into carve-outs.

00:05:49: Carve-outs are a nightmare if you aren't prepared

00:05:52: Seriously?

00:05:53: Real quick If your listening to this and currently drafting on one hundred day plan or looking at a carve out make sure you subscribe so that catch our future deep dies of these specific operational tactics.

00:06:03: Good but getting back to carve outs TSA The transition service agreement is just mind field.

00:06:08: Did you see the stat that sixty-eight percent of IT related carve out?

00:06:12: TSAs require an extension?

00:06:15: Yes.

00:06:15: Sixty eight percent

00:06:17: and that is so expensive!

00:06:19: It destroys value, costs climb from what unexpected one point.

00:06:23: five to three percent a target revenue upto as much as five percent.

00:06:27: Yeah sometimes even five percent And that immediately compresses your margin in year one.

00:06:31: it's

00:06:31: brutal But here's the thing, you can't execute any of this.

00:06:35: Not the TSA extraction not The third company model.

00:06:39: without the right leadership in place.

00:06:41: You really can't which perfectly explains the massive executive turnover we're seeing post deal.

00:06:46: It's staggering.

00:06:47: Seventy-three percent of founder CEOs are replaced within eighteen months of a PE deal.

00:06:52: seventy three percent.

00:06:54: it's wild.

00:06:55: But the primary reason, according to sources is that nobody actually taught these founders new board dynamics.

00:07:01: Right they're being graded on a completely new rubric

00:07:03: Exactly!

00:07:04: They know their product and market but don't how manage a highly leveraged PE Board.

00:07:08: So How do successful ones operate differently?

00:07:11: Well... The best PE-backed CEOs.

00:07:15: They treat that one hundred day plan as a ceiling, not just goal.

00:07:18: Okay how so?

00:07:20: They arrive on Day One with their views of the legacy leadership and cost base already formed.

00:07:25: they aren't going onto listening to her

00:07:27: Right!

00:07:27: They're executing immediately

00:07:28: Exactly!!

00:07:29: Look at Akoya

00:07:30: Capital!!!

00:07:31: They were highlighted as prime example an operator-led firm built around twenty two platforms.

00:07:37: half billion deployed.

00:07:38: heavily prioritized actual operators over pure financial experts

00:07:43: which is smart.

00:07:44: But you know, hiring is arguably the highest leverage move in PE right?

00:07:49: A great team can overcome a week strategy but not the other way around

00:07:52: hundred percent.

00:07:53: so with all this focus on the CEO our sponsors kind of blinding themselves to the actual MVP of The C-suite.

00:07:59: I'm talking about the CFO.

00:08:01: Oh!

00:08:01: The CFO role has completely changed.

00:08:03: that's a huge point Right?

00:08:05: i mean there was That Great example shared About a CFO who drove one point two billion dollars In EBITDA growth.

00:08:10: Yes

00:08:12: and they credited the entire success to underwriting every single major commitment rather than just acting like a historian reporting on the past.

00:08:20: That's the difference, A traditional CFO tells you what happened last quarter.

00:08:24: A PECFO has to underwrite the future.

00:08:27: They have to tie every operational move directly to the exit multiple.

00:08:32: But that intensity is burning people out, isn't it?

00:08:34: Oh

00:08:34: absolutely Proven PECFOs are burning and leaving within twelve-to eighteen months right now Which

00:08:40: is crazy turnover for such a critical role.

00:08:43: It's forcing PE firms to rely on interim CFOs.

00:08:47: just keep value creation moving or they're having to hire first-time PECFOs because the veteran talent pool is just tapped out.

00:08:55: So if you in capital has stretched this thin and there's all this extreme pressure on operations, where do firms turn?

00:09:01: They turned into infrastructure specifically AI.

00:09:05: right embedding AI directly into the portfolio And the timeline on this as shifting aggressively.

00:09:09: Yeah Ai and private equity is rapidly moving away from those You know.

00:09:13: twenty twenty five proof of concept pilots There are going straight into production deployment for twenty twenty six.

00:09:18: But there's friction, too.

00:09:20: McKinsey just found that while seventy percent of employees actually feel ready to use AI...

00:09:24: Only twenty-seven percent of leaders believe their organization is prepared?

00:09:28: Exactly!

00:09:29: But despite that… There's a massive capital arms race happening.

00:09:33: Huge!!

00:09:34: Look at Blackstone and Hellman & Freedmen – they just farmed

00:09:37: ODE!!!

00:09:38: It's one point five billion dollar AI joint venture with Enthropic.

00:09:43: A billion and a half dollars!

00:09:45: And OpenAI immediately countered, With four billion-dollar venture backed by TPG.

00:09:51: Okay but let me ask you this because there's a lot of hype here Are these PE firms basically just buying really expensive sauce licenses for their portcos?

00:09:59: Or is it like fundamental rewiring the business model?

00:10:03: That's

00:10:03: The Billion Dollar Question.

00:10:04: Right

00:10:05: Because I think about historical shift from say paper ledgers to the first ERP systems, that changed everything.

00:10:11: Is this THAT big?

00:10:12: The hard evidence suggests it actually is a fundamental rewiring!

00:10:15: Really how

00:10:16: so?!

00:10:17: Well

00:10:17: with ODE their engineers are literally physically embedded at places like Citroen Cooperman building proprietary client portals.

00:10:25: Yeah they're at Baker-Tilly US Physically mapping and automating tax and audit workflows.

00:10:30: They aren't just selling software They're changing the production line.

00:10:34: And it's not just the mega funds doing this, yeah onyx labs Just launched an egenic operating system for everything from diligence all The way through to exit

00:10:43: Right, end-to-end.

00:10:44: And supply... this is a great example.

00:10:46: they're automating accounts receivable to target those crazy forty five to sixty day plus DSOs that are so common in manufacturing and distribution

00:10:54: which goes right back what we said at the start.

00:10:56: cash generation yeah if you can automate AR and drop your DSO by thirty days The

00:11:01: working capital UNLock is

00:11:02: massive.

00:11:03: Exactly it's all about getting that DPI.

00:11:06: So summarizing all of these entire industry is violently pivoting toward execution.

00:11:11: The financial engineering era has closed, and it's all about the operators now.

00:11:15: A hundred percent!

00:11:16: You have to be able to actually run the business...

00:11:19: Which leads me into this final kind of provocative thought for you to mull over.

00:11:23: We've talked extensively today about building platforms and integrating targets right?

00:11:27: Yeah But consider this data point from the sources.

00:11:30: Right Now landscaping consolidation is running almost entirely through bolt-ons Not new platforms.

00:11:37: Interesting,

00:11:37: why?

00:11:38: Because most platform-ready targets out there simply lack a strong leadership bench.

00:11:44: So it really makes you question How are you evaluating the leadership bench strength of your next platform acquisition?

00:11:50: because if it's not they're none Of this works.

00:11:52: that is exactly The right question to be asking right now

00:11:55: If you enjoyed this episode.

00:11:56: new episodes drop every two weeks.

00:11:58: also check our other editions on PE Fundraising, PE, Exit Strategies, Venture Capital, M&A and Strategy & Consulting.

00:12:06: Thank you so much for joining us!

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