Best of LinkedIn: Private Equity: Exit Strategies 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: Exit strategies insights in calendar weeks thirty-four and thirty five.

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

00:00:18: And today we are taking deep dive into the absolute top private equity exit strategy trends that are just dominating the conversation on LinkedIn right now.

00:00:29: Yeah, we really have to frame the reality of this situation here because the exit environment for private equity hasn't shifted slightly.

00:00:37: it has fundamentally fractured.

00:00:38: Oh

00:00:39: completely!

00:00:39: It's a structural gridlock.

00:00:40: So today were going to unpack how the absolute smartest general partners founders and LPs are adapting

00:00:47: Right

00:00:48: Because you had this massive exit backlog Completely new math of returns and, of course these alternative deal structures that people are using to force liquidity.

00:00:56: Yeah And I think we should just start by defining the sheer scale this capital trap because The physics of this backlog it pretty much dictates everything else We're gonna talk about today.

00:01:05: It's the elephant in the room

00:01:06: exactly.

00:01:07: so So Hail Juma Michael C Eisenbahn and Leslie D actually recently aggregated the damage across-the-market And we are looking at roughly thirty two thousand to thirty three thousand companies just sitting unsold in PE portfolios.

00:01:24: Wait, thirty-two thousand individual companies?

00:01:27: Thirty-two to thirty-three thousand yeah which represents about three point eight trillion dollars in value.

00:01:32: That is I mean that's almost incomprehensible.

00:01:35: Three point eight Trillion Dollars Just Trapped In Holding Pattern Right.

00:01:39: trapped and mechanistically that means the average hold period for these assets Is now pushing towards seven years.

00:01:44: Seven Years Which If you think about it, that completely breaks the traditional fund model.

00:01:49: Oh

00:01:49: absolutely!

00:01:50: Because

00:01:51: if your an LP right and you're expecting liquidity in year five so you can find your next vintage commitment a seven-year hold means your entire allocation strategy is just jammed up.

00:02:00: Yeah

00:02:00: The cash flow just completely stops.

00:02:02: Right.

00:02:02: But

00:02:03: honestly...the whole period itself isn't even the scariest part to me.

00:02:07: It's the underlying bath.

00:02:09: because if look at the twenty ten to twenty twenty one era of private equity..it was like It was like sailing with this massive structural tailwind.

00:02:18: Oh, one hundred percent cheap debt everywhere

00:02:20: exactly cheap debt and automatic multiple expansion.

00:02:24: just did all the heavy lifting for GPs.

00:02:27: you could.

00:02:28: You can buy a mediocre business at ten times earnings do absolutely nothing but lever it up at four percent And then turn around sell it twelve times.

00:02:35: The carry practically generated itself in that environment.

00:02:38: he really dead and now the wind is completely died.

00:02:42: Yeah, that artificial margin expansion is just dead.

00:02:45: Seth, Marin and Yanni Koen both posted about this recently pointing out that the decades-long era of falling interest rates is permanently over.

00:02:52: It's a total reset

00:02:54: Exactly!

00:02:54: The cost of capital has completely reset which actually brings us to this new underrating mantra from Bain That it's making their rounds across investment committees right now.

00:03:03: Oh...the

00:03:03: twelfth as the New Five thing.

00:03:04: Yes,

00:03:05: Twelfth As A New Five.

00:03:06: I

00:03:07: saw that but can we break down what that requires operationally?

00:03:11: Yeah so Bain essentially saying The two point five times return a deal used to earn on just a five percent annual EBITDA growth.

00:03:20: To hit that exact same target today, you need ten-to twelve percent growth.

00:03:25: Ten-to-twelve percent annual Ebitdo growth

00:03:28: every single year?

00:03:29: Yeah but asking a mature middle market industrial or manufacturing business to suddenly just generate twelve percent annual growth in high cost inflationary environment I mean, that borders on delusion.

00:03:42: It really

00:03:43: does!

00:03:43: So how are GPs actually underwriting it without just straight-up lying to themselves in the models?

00:03:48: Well well...the harsh reality is they often rely on incredibly aggressive assumptions and make them math work.

00:03:54: which exactly why the exit market has stalled?

00:03:56: Because buyers aren't buying this story

00:03:58: Right.

00:03:58: The market isn't handing out free multiple expansion anymore.

00:04:01: so if underlying business can't organically grow twice as fast to offset debt costs the GP refuses to sell.

00:04:08: They won't take the mark down, they just extend the hold.

00:04:10: Which creates a really fascinating paradox in that data actually.

00:04:14: Wayne Marhelski highlighted this In twenty-twenty five overall exit value was actually up forty one percent to one point.

00:04:21: three trillion dollars.

00:04:23: Wow!

00:04:23: Forty One Percent?

00:04:25: Yeah So you see that headline and think oh...the market is recovering.

00:04:29: But if look at mechanics The actual count of exits Fifteen percent.

00:04:34: Oh wow, so it's a total tail of two markets

00:04:37: exactly.

00:04:37: the mega cap deals are clearing because you know sovereign wealth funds and Massive strategic buyers have the balance sheets to just swallow them whole.

00:04:47: right but the middle market volume Which is the absolute lifeblood?

00:04:50: Of private equity that completely gridlocked nobody is trading

00:04:54: except in India.

00:04:55: actually oh Right

00:04:56: Rohan pearl car pointed out this incredible geographic anomaly.

00:05:00: Indian private equity is moving in the exact opposite direction of the global trend right now.

00:05:05: It's wild!

00:05:05: They're maintaining a one-to-one deployment to exit ratio,

00:05:08: which?

00:05:09: A One To One Ratio In This Macro Environment Is Almost Unheard Of

00:05:12: Right.

00:05:13: but if you look at the plumbing of why it's happening...it actually makes perfect sense its being driven by a highly liquid domestic IPO market and a massive surge in block trades.

00:05:24: oh

00:05:24: okay

00:05:25: yeah.

00:05:25: Western sponsors are exiting their indian portfolio companies by just selling large blocks of shares directly into the public markets.

00:05:32: Yeah, because a domestic institutional liquidity in India is deep enough to actually absorb it.

00:05:37: they

00:05:38: aren't hoarding assets.

00:05:39: The capital's actually flowing

00:05:41: exactly.

00:05:42: but you know if we pivot back To the western markets for a second We really have to ask why?

00:05:46: The backlog remains so incredibly Stubborn here.

00:05:50: Yeah,

00:05:50: and a massive piece of that puzzle is just the sector composition of these older vintages.

00:05:55: A huge chunk of these trapped portfolios Is software?

00:05:59: Oh yeah.

00:06:00: And right now technology evaluation models have just completely broken down.

00:06:03: They really

00:06:04: have.

00:06:04: Ivan Luthon shared some data showing that Technology acquisitions plummeted fifty percent in The first half of twenty-twenty six compared to the prior year.

00:06:13: fifty percent.

00:06:14: That is a cliff.

00:06:14: It's a total cliff.

00:06:16: Meanwhile, non-tech acquisitions actually increased by nine percent.

00:06:20: buyers are aggressively rotating into like industrial services and hard assets.

00:06:25: So why do you think the buy side is suddenly so terrified of software?

00:06:30: Well I mean You look at the landscape.

00:06:32: it comes down to the existential threat of AI.

00:06:35: really senile radia broke down the mechanics of this perfectly.

00:06:39: ai Is having a deeply contradictory impact on m&a right now.

00:06:43: how so?

00:06:44: So?

00:06:44: on the front end, it makes software targets virtually unpriceable.

00:06:48: If you're a buyer looking at a traditional sauce company right now your primary question is about the defensibility of their code

00:06:54: Right like.

00:06:54: what does he actual mode

00:06:55: exactly?

00:06:56: You have to ask yourself will this companies competitive moat even exist in twenty four months?

00:07:00: or Is an open source LLM rapper going just commoditize there entire product suite?

00:07:05: and because nobody can answer that with any real certainty The risk premium just skyrockets

00:07:10: precisely and buyers Just walk away.

00:07:12: They just sit on their hands.

00:07:14: It really completely ends PEs, what you might call the patience era.

00:07:18: You can't buy a tech platform install and use sales team, hold it for five years.

00:07:24: And then rely on recurring revenue multiples to bail you

00:07:26: out.".

00:07:27: No!

00:07:27: You absolutely can't...and that actually brings up the second impact of AI which is that It has become The ultimate weapon during due diligence.

00:07:35: Oh I heard about this.

00:07:36: Yeah private equity firms are no longer just auditing the financials Of a tech target.

00:07:42: They're deploying AI agents To literally try and rebuild the targets core software in A sandbox environment over a weekend.

00:07:50: Wait real over a weekend?

00:07:51: Over a single weekend.

00:07:53: If the buyer's technical diligence team can easily replicate your proprietary tool using existing AI models in three days, you're competitive.

00:08:00: moat was just a narrative and evaluation collapses instantly.

00:08:04: that is ruthless but honestly it's exactly The kind of technical scrutiny You need when multiples are this compressed And you're even seeing that same level of AI scrutiny hitting the investment committees themselves.

00:08:16: Yeah, John Maldonado discussed this.

00:08:18: He noted how ADVENT International has actually built an internal AI observer specifically for its IC meetings.

00:08:26: That's fascinating!

00:08:27: Think about the mechanics of how an IC Observer actually functions though.

00:08:30: it is not just a basic chat

00:08:31: bar Exactly...it's parsing years of historical data.

00:08:36: It tracks how ideal teams' investment assumptions shift over time.

00:08:39: Okay so if partner pitched like a, so software deal back in twenty-twenty three with a fifteen percent terminal growth rate.

00:08:46: Right

00:08:47: And now they're pitching a similar asset today but claiming at twenty five percent growth rate just to justify higher entry.

00:08:54: multiple the AI flags that inconsistency.

00:08:56: It literally learns from committee's historical questions to find structural flaws and alive pitch.

00:09:02: it removes blind spots internal bias.

00:09:05: That is incredible

00:09:06: It is, which perfectly sets up our next reality.

00:09:09: If you can't rely on multiple expansion and your tech thesis as under a microscope You have zero choice but to build verifiable operational business value.

00:09:17: The standard of proof for an exit has completely changed.

00:09:21: By the way before we get deep into the operational trenches here if you're finding this deep dive useful Make sure you subscribe so you catch are future additions on value creation And fundraising.

00:09:31: So looking at exit readiness Ricky Jayme and Sam Chakraborty highlighted this persistent disconnect between founders and sponsors.

00:09:39: Exit Prep is no longer a one-hundred day sprint where you just, y'know... hire a banker to clean up the trailing twelve months of financials!

00:09:47: It's

00:09:47: not quick polish anymore?

00:09:49: No it is structural work that has to begin years in advance.

00:09:52: They cited an EY survey showing that ninety three percent of PE leaders agree exit prep boosts valuation.

00:10:00: Which makes sense,

00:10:01: but then sixty five percent of them still fail to actually capture that value in their exit EBITDA.

00:10:07: Wait how do you spend three years prepping for an exit and still failed to capture the value?

00:10:11: That seems insane

00:10:12: because In this market buyers simply will not underwrite paper profits.

00:10:16: You know in twenty-twenty one you could hand a buyer A pro forma adjusted EBITTA schedule filled with like imaginary synergies And one time ad backs and they would just price it in.

00:10:25: oh yeah everything got a pass

00:10:26: today If the savings aren't fully realized and verified in a quality of earnings report, The buyer just strips it out of the model entirely.

00:10:36: But let me challenge that for second.

00:10:38: if buyers are demanding higher verified margins can't GPs Just lean on the classic private equity playbook you know?

00:10:45: send-in the operating partners slash overhead optimize the headcount, and just artificially manufacture that margin bump right before the process launches.

00:10:54: You can try but there is a hard mathematical ceiling to that strategy now.

00:10:58: Seth Maren shared some definitive research analyzing ten thousand deals.

00:11:03: Ten thousand?

00:11:04: That's a massive sample size!

00:11:05: Massive...and they found that cost cutting accounted for just fourteen percent of total value created.

00:11:10: Fourteen percent wow

00:11:12: Right well revenue growth drove fifty four percent.

00:11:14: But here is really critical mechanism.

00:11:17: Once a company's EBITDA margin crosses the thirty percent threshold, further cost-cutting under sponsor ownership actually leads to margin contraction.

00:11:25: Wait how does cutting costs shrink the margin?

00:11:27: Because you hit the bone.

00:11:28: if you cut past thirty percent You aren't trimming fat anymore!

00:11:32: Your firing your top enterprise account executives...you are starving the R&D pipeline

00:11:38: Right.

00:11:39: customer success degrades churn spikes and your top line revenue falls way faster than the expenses you just cut.

00:11:45: Exactly The business just begins to bleed out.

00:11:48: You literally cannot shrink a business into premium valuation, and there is massive human element in this extended hold period that destroys value too.

00:11:59: Dmitry Mastrogelov pointed out the totally unseen operational risk which is that portfolio company General Counsel Retention completely breaks down around year six

00:12:08: Which is exactly when the average hold period is peaking right now.

00:12:11: Right,

00:12:11: so think about the equity structure.

00:12:13: The management team received options that were priced for a three to five year liquidity event.

00:12:17: Yep If the GP extends that hold to Year Seven That equity feels like dead money To them.

00:12:22: They get fatigued

00:12:23: Exactly Yeah.

00:12:24: So the GC leaves And when they leave You lose a decade of critical institutional memory.

00:12:29: There are ones who know where their bodies Are buried in IP contracts.

00:12:32: The legacy HR disputes The environmental liabilities.

00:12:36: Losing them right before you open a data room is an absolute disaster

00:12:40: because the incoming buyers legal diligence team will absolutely tear A new inexperienced GC apart.

00:12:48: one hundred percent.

00:12:49: and it's not just legal.

00:12:50: Asif Rahman noted that the CFO role has entirely mutated as well.

00:12:54: Sponsors no longer just need a CFO who can manage a balance sheet, they expect deep technical fluency.

00:13:00: Technical fluency from a CFA?

00:13:02: Yeah!

00:13:02: CFOs today are required to build and structure massive internal data lakes so that three years down line The Exit Data Room Can actually support AI-driven diligence processes we were talking about.

00:13:13: That makes total sense because if your data isn't structured for machine to read it you aren't ready sell.

00:13:19: The stakes for getting this operational piece right are basically binary.

00:13:24: Right now

00:13:25: absolutely,

00:13:25: you know Edwin young broke down Apollo's buyout of McGraw Hill as the textbook success case.

00:13:30: For this Apollo bought them four two point five billion and over their hold period They fundamentally rewired the revenue model

00:13:38: rate pushing digital revenue up great

00:13:40: exactly.

00:13:40: they pushed Digital Revenue from twenty-five percent Of the mix to over sixty percent.

00:13:46: That digital transformation justified a massive markup, and they eventually sold it to Platinum Equity for four point five billion.

00:13:53: So they

00:13:53: built actual verifiable enterprise value?

00:13:55: Exactly

00:13:56: Contrast that with the valuation collapse Andrea Malinti highlighted regarding Sheen's recent Hong Kong listing.

00:14:02: Oh man!

00:14:03: That was brutal.

00:14:04: They

00:14:04: listed an evaluation of roughly twenty six billion dollars Which is a seventy three percent haircut from its twenty-twenty two private market peak of ninety eight point

00:14:15: two billion.

00:14:15: A seventy-three percent haircut on a hundred billion dollar asset is just staggering.

00:14:20: The late stage private backers who bought into that peak valuation based purely on growth hype and multiple expansion got completely wiped out.

00:14:28: Wiped out, the fundamental unit economics just couldn't support the paper valuation

00:14:33: right so for the middle market companies that actually are operationally sound.

00:14:37: how are they driving liquidity today?

00:14:39: Because traditional sponsor-to-sponsor buyouts, which is basically the bread and butter of the industry just hit a decade low with twenty four point five billion.

00:14:46: Yeah that traditional exit door is jammed right?

00:14:49: Which is forcing a massive structural evolution in how these deals are built.

00:14:54: The architecture of the transaction is now Just as critical as the enterprise value itself.

00:14:58: absolutely And David Hauser laid out a scenario That perfectly captures this.

00:15:03: Imagine two founders exiting identical businesses on the exact same day.

00:15:08: okay Both sell for an enterprise value of thirty million dollars.

00:15:12: Founder A walks away with twenty four million net, founder B walks away just fifteen million.

00:15:19: And the nine million delta wasn't negotiation.

00:15:22: it was entirely based on tax architecture and trust structures they put in place three years prior.

00:15:28: It's all in this structuring.

00:15:29: John Kuppel actually highlighted how changes to the QSBS threshold, The Qualified Small Business Stock Exemption are actively reshaping these architectures.

00:15:37: How so?

00:15:38: Because of the gross asset threshold for QSB's eligibility got bumped to seventy-five million dollars.

00:15:43: a massive swath of middle market exits now qualify essentially zero out federal capital gains taxes...zeroout.

00:15:50: But if your legal team didn't structure original equity grants to comply with holding periods you just forfeit millions of dollars at closing.

00:15:58: That is a brutal, unforced error!

00:16:00: You truly brutal...

00:16:02: And beyond tax optimization we are seeing founders and GPs turn to entirely alternative exit vehicles because the traditional buyout funds aren't writing checks.

00:16:12: Michael Chase and Chris McClellan have tracked massive spike in independent buyouts and employee ownership trusts.

00:16:18: Oh yeah…and Daniel Rust noted very similar surge in management buyouts.

00:16:23: but look how these are actually financed.

00:16:26: In an MBO or EOT, the employees aren't pulling cash out of their own pockets to buy a fifty million dollar business.

00:16:32: Obviously not!

00:16:33: They are essentially financing the purchase by drawing down against the company's future free cash flow.

00:16:38: The retiring founder takes a vendor note maybe in Nernout and management team backs themselves generate profits required pay off debt.

00:16:46: It creates perfect alignment.

00:16:47: I love mechanics but for the founders who are still trying to sell a traditional private equity sponsor right now.

00:16:56: Aaron, nice bit!

00:16:57: issued a very serious warning about the rise of The Zombie Buyer.

00:17:01: Oh, the highly leveraged platform add-on!

00:17:04: This is where deal structures get incredibly dangerous for sellers.

00:17:07: Selling

00:17:07: to A Zombie Platform right now?

00:17:09: Yeah It's basically like handing the title Of a beautifully renovated house over To a guy who was actively drowning in credit card debt and all he gives you In return as handwritten IOU.

00:17:18: That

00:17:19: Is exactly what rollover equity looks Like Right Now.

00:17:21: Mechanistically founders are being asked to take heavy rollover Equity or seller notes just to bridge the valuation gaps.

00:17:29: But if you are rolling your equity into an aging highly leveraged sponsor-backed platform, Your paper sits subordinate to their debt and that debt is often structured with compounding PIK interest payment in kind.

00:17:42: so it's silently growing eating up all of the equity value on the capital sack.

00:17:46: but at a time when this sponsor finally tries to exit the platform That PIK interests has wiped out You're seller note is essentially worthless

00:17:53: which is exactly why LPs are demanding alternative liquidity mechanisms, leading to this massive explosion of GP-led continuation vehicles.

00:18:04: Michael Hruby noted that CVs are the next major structural evolution in private equity.

00:18:09: it's now a hundred billion dollar plus market.

00:18:12: I know they provide liquidity but aren't continuation vehicles historically just a parking lot for failed exits?

00:18:20: away for a GP to avoid taking a markdown on the dog of an asset.

00:18:25: That is definitely the stigma, but James Ransom provided some really excellent structural nuance on this.

00:18:30: CVs have evolved far beyond just parking bad assets.

00:18:34: take professional services firms.

00:18:36: If a GP owned an accounting or consulting roll-up, they often need significant capital runway to fund aggressive M&A.

00:18:43: Or build out proprietary tech stacks... ...or even poach expensive senior partners from rivals!

00:18:48: Right which takes time

00:18:49: Exactly.

00:18:50: A traditional funds ticking clock forces a premature sale.. ..a continuation vehicle strips away that timeline and provides fresh capital To actually finish the investment thesis.

00:18:59: And there is massive economic incentive for LPs as well.

00:19:03: Paul Cohn pointed out that rolling assets into a CV saves LPs roughly six billion dollars per year in combined management fees and carry compared to the frictional costs of just selling this asset for new sponsors.

00:19:18: That's real money, but you still have to underwrite it.

00:19:22: Richard Liu provided what I think is the ultimate test for an LP evaluating a GP-led continuation vehicle.

00:19:28: What's it does?

00:19:29: He asks, would you buy this asset today if you didn't already own it?

00:19:33: Yeah like that

00:19:34: If he answers no its not strategic hold.

00:19:36: It's zombie and need to take cash option.

00:19:38: walk away.

00:19:39: That is perfect filter.

00:19:40: But as secondary transactions in CVs explode in volume The actual market infrastructure is buckling under weight.

00:19:47: Camilla Molina Nysum shared a detail that honestly blew my mind.

00:19:51: Oh, the WhatsApp thing?

00:19:52: Yes she was tracking a forty million dollar secondary transaction like an actual transfer of LP interest.

00:19:59: That was literally being negotiated documented and cleared over whatsapp.

00:20:03: It sounds absurd but if you look at the plumbing of the secondary market it makes perfect sense.

00:20:07: Really Yeah because there is no centralized digital clearing house for private equity stakes.

00:20:14: Every limited partnership agreement is entirely bespoke.

00:20:18: You have... GP consent rights, rights of first refusal complex tax withholdings across different jurisdictions.

00:20:26: because the structural friction is so incredibly high and The digital infrastructure.

00:20:31: Is basically non-existent.

00:20:32: a forty million dollar trade defaults to text messages between brokers

00:20:36: that is A multi trillion Dollar industry operating on duct tape.

00:20:40: it really is.

00:20:40: but despite all Of this friction evaluation gaps the interest rates the structural headaches when patient capital is deployed correctly is still massive.

00:20:50: Doug Krupa and David Harmeier broke down KKR's recent seventeen billion dollar sale of USI insurance to Aeon.

00:20:58: KKr didn't just flip it.

00:20:59: in three years, they held on their balance sheet patiently funded the M&A roll-up strategy and ultimately generated a six times equity return.

00:21:07: Wow!

00:21:08: Six times?

00:21:09: Yeah

00:21:09: proves that model works if you have run

00:21:11: one.

00:21:11: It does but requires genuine operational discipline not financial engineering.

00:21:16: And that really brings us to the core reality of this market.

00:21:19: We've spent this deep dive dissecting all these structural gymnastics continuation funds, rollover equity employee ownership trust but ultimately an exit is just a transfer risk from one balance sheet to another as average whole period stretched toward a decade and the cost of capital remains punishing you have.

00:21:40: When we restructure these deals, are we actually building fundamentally better businesses or were simply running out of creative places to hide the risk?

00:21:48: It is definitely something to chew on next time you sit down and review your

00:22:05: portfolio.