Best of LinkedIn: Private Equity: Exit Strategies CW 36/ 37

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

00:00:06: Exit strategies' insights in calendar weeks thirty-six Frennus supports PE backed manufacturers with the market intelligence needed to unlock revenue from idle production capacity.

00:00:17: You can find more info in the description, but right now we are jumping straight-in because if you're an M&A or strategy professional listening to this deep dive... ...you probably already know that traditional exit door is well.

00:00:28: it's practically bolted shut.

00:00:30: Yeah!

00:00:30: Bolted Shut is putting it mildly.

00:00:31: I mean we are mapping out a fundamentally shifting landscape today.

00:00:35: yeah cut through the noise and look at this massive exit backlog, the frankly desperate liquidity workarounds we are seeing.

00:00:43: And how alternative buyers are stepping in

00:00:45: right?

00:00:46: And of course the new mandate for permanent exit readiness.

00:00:49: so let's start with The Elephant In The Room driving all of those which is just the sheer weight of unsold assets sitting out

00:00:54: there.

00:00:55: it staggering.

00:00:55: if We Look At Data from Bain's twenty-twenty six report they're showing thirty two thousand unsolved companies Sitting in PE portfolios Right Now.

00:01:03: Yeah That is three point eight trillion dollars worth of assets.

00:01:08: And the craziest part isn't just a dollar amount, it's that timeline.

00:01:12: Average.

00:01:13: hold periods are now stretching out to seven years

00:01:16: Seven Years?

00:01:17: I mean thats wild because the historical average is what?

00:01:19: five

00:01:20: Five to six exactly.

00:01:21: Yeah and McKinsey actually put up some findings on this too.

00:01:23: They noted that sixteen thousand companies globally have been held for over four years Now Which translates to fifty two percent Of all buyout inventory.

00:01:33: Over half the market is just.

00:01:35: it's in there.

00:01:36: It's

00:01:36: completely jammed and

00:01:37: pitchbook even sized this up specifically for older funds.

00:01:40: They called it an eight hundred and sixty billion dollar zombie problem.

00:01:44: four funds older than seven years Just dead weight.

00:01:47: And if you want to know how bad it is on the ground Chris Barber shared This observation that The deals-to-exit ratio has widened out To two point nine

00:01:54: X meaning they're buying almost three times as much As their selling

00:01:57: exactly.

00:01:58: And of the exits that are actually happening, Barbara points out that sixty-five point eight percent off all exit value is concentrated in just twenty two mega exits.

00:02:06: Wait really?

00:02:07: Just twenty...just

00:02:08: twenty two.

00:02:08: So unless you have an absolute top tier pristine asset You aren't escaping this backlog.

00:02:14: Okay but let me push back on this a little bit.

00:02:16: If hold company for seven years instead four Assuming it's good company Doesn't return math break To me its like a taxi meter running while your stuck traffic.

00:02:25: Yeah Even if the company's doing well, The time value of money just crushes the

00:02:30: IRR heart.

00:02:31: Absolutely breaks some math.

00:02:32: and this is exactly what Umar Shaheed highlighted.

00:02:35: he looked at that twenty nineteen to twenty-twenty one Vintage right

00:02:37: the peak years

00:02:38: Right?

00:02:39: And those expected IRRs are plummeting To the seven to twelve percent range because you know You had those super high entry multiples back then Combined with his wildly extended Time Horizon.

00:02:48: now the cost Of waiting Just compounds.

00:02:51: it's brutal.

00:02:52: yeah in Jay goth share This stark statistic.

00:02:55: Looking at those aging companies, three thousand three hundred thirty two of them have done zero deal activity if any kind since twenty-twenty one.

00:03:02: No add ons no nothing.

00:03:04: they're literally just sitting in traffic with the meter running man.

00:03:08: that is rough.

00:03:09: so since traditional M&A and IPO exits are totally jammed up let's pivot to how GPs actually engineering their own liquidity because they have impatient LPs right?

00:03:21: They do!

00:03:24: and sometimes pretty aggressive to satisfy LPs who want their cash back.

00:03:29: Yeah, Stephanie McCann had a great insight on this regarding dividend recaps because earlier this year recap volume was down like forty percent.

00:03:37: sponsors were holding off betting But with M&A stalled, recaps are just roaring back.

00:03:44: Right they lost the bet

00:03:45: Exactly and Trevor Noren put out a real warning about this.

00:03:48: He called out structured equity as basically a kick-the-can tactic.

00:03:51: It just delays the reckoning of these overvalued assets.

00:03:54: That's

00:03:54: totally kicking the can And speedy release.

00:03:56: elsewhere has to talk about the secondaries market.

00:03:58: Luke Flemmer & Lasha Zazam both highlighted massive explosion in secondaries as a liquidity workaround.

00:04:05: Like shifting away from standard exits?

00:04:07: Yeah, huge shift toward LP-led and GP led secondary transactions.

00:04:11: it's becoming the primary way to manufacture liquidity

00:04:14: which is fascinating.

00:04:16: and uh real quick if you want to keep tracking these structural market shifts with us make sure you hit subscribe so you can catch our future deep dives.

00:04:23: we love getting into the weeds on this stuff

00:04:25: absolutely.

00:04:26: but getting back to the workarounds dimitri master cola pointed out something super interesting about continuation vehicles or cvs.

00:04:33: They are actively stressing LP trust.

00:04:35: Oh, massively?

00:04:37: Yeah and because of that tension it's completely changing the general council role at these firms.

00:04:42: Firms are now hiring GCs specifically to manage these exact conflicts literally to tell the deal teams to slow down before they anger their entire LP base

00:04:51: Which is a huge shift in power dynamic internally And it's not just private maneuvers.

00:04:56: Mutaseem Khan shared this really striking example about Blackstone's Indian IPO.

00:05:01: when

00:05:01: Blackstone does an IPO there right now, they're using eighty to ninety percent of the fresh IPO capital strictly to repay their own debt.

00:05:09: that is insane

00:05:10: Right because the market average is only twenty nine percent.

00:05:13: It just highlights how aggressively sponsors are using public markets purely for debt clearance Not For Growth.

00:05:19: So they're basically using retail investors as an exit liquidity dump to clear their balance sheets.

00:05:25: Pretty much

00:05:25: so.

00:05:26: while PE sponsors are, you know engineering their way out of these holds founders and business owners or watching all this They're looking at the math and actively choosing completely different buyers right?

00:05:38: The alternative buyer space is just heating up

00:05:41: it really is.

00:05:42: Matthew B. Borner broke down the math on this beautifully comparing a PE buyer to a family office.

00:05:49: Okay, walk me through that.

00:05:50: So a PE fund has a rigid four-year horizon and they're aiming for at twenty five percent IRR to hit That.

00:05:57: they have to aggressively transform the business.

00:06:00: They have to mutate it right but a family office as a ten plus year hold And they're looking at a twelve to eighteen percent IR so you don't have To radically change the company?

00:06:07: They literally just have to not break It.

00:06:09: Ben Morley actually noted this is exactly why Family offices are moving direct into The lower middle market.

00:06:15: they Have no exit clock and founders love.

00:06:17: Yeah, that makes total sense.

00:06:18: And it's not just family offices.

00:06:20: selling to your own team is huge right now.

00:06:23: Gokhan Ous was talking about this sharp demographic driven rise in management buyouts or MBOs

00:06:30: Silver Tsunami.

00:06:31: Exactly boomer founders retiring but he frames the MBO as The ultimate test of whether a founder successfully built A business That can actually run without them because the Management Team has To take on debt to buy Them out

00:06:44: and the bank won't fund It If the founder is the only one who knows how to run the place.

00:06:48: Right,

00:06:49: and then there's the ESOP route?

00:06:51: Yeah Tom Mellon brought up the Matthews archery example.

00:06:54: huge manufacturer.

00:06:55: they chose an employee ownership path in ESOP over a traditional PE sale.

00:07:00: it's all about retaining control

00:07:02: which Chris Busani has also touched on.

00:07:03: right with RIA space yep

00:07:05: he pointed to Confluence Financial this seven point six billion dollar RIA.

00:07:09: They intentionally took minority capital to retain operational control And Darren Gleeman is aggressively pushing this concept of independent buyouts.

00:07:19: How does that work?

00:07:20: Basically, he argues founders don't need a PE fund to get liquidity.

00:07:25: Why hand over a thirty percent rollover and give up a majority veto when you can structure an independent buyout yourself?

00:07:31: I mean Founders are realizing that a premium multiple upfront just isn't worth it if the buyer destroys them assured they built.

00:07:38: It's like It's like selling your prized vintage car to someone who immediately tells you they're going to scrap it for parts.

00:07:44: They want patient capital instead?

00:07:46: That is the perfect analogy, but we still have talk about companies that are already inside of a machine... Right!

00:07:51: The thirty-two thousand unsold ones

00:07:54: Exactly For those PE backed companies stuck in this extended holding pattern.

00:07:59: how do actually survive?

00:08:01: and more importantly How did they prepare to eventually sell at market so tight?

00:08:05: Right, so let's get into this new mandate for permanent exit readiness because the portfolio governance model is totally shifting.

00:08:12: Josh Rosenberg and Gulsion Patel had some great data on this.

00:08:16: they noted that eighty-six percent of PE leaders now say early preparation like twelve to twenty four months out drastically improves valuations.

00:08:25: I can't just slap a book together at the end of year four anymore.

00:08:27: No not all.

00:08:28: but tell me the point that public companies are in state of permanent readiness.

00:08:32: Private companies now have to adopt that exact same equity story discipline.

00:08:37: And Hitanch Singhala pointed out, because the five-year hold is essentially a fiction.

00:08:42: now portfolio boards completely change how they govern.

00:08:46: you can't use a five year incentive structure for seven years

00:08:49: which totally rewires.

00:08:52: Barry Toren was saying that the CFO now must be quote-unquote situation ready.

00:08:58: Meaning what exactly?

00:08:59: Meaning they can't just prep for a standard IPO, They have to be able to seamlessly navigate a continuation vehicle process or suddenly pivot to a dividend.

00:09:07: recap...they have to Be hyper flexible.

00:09:09: and Asif Rahman added that sponsors now expect CFOs To deeply understand the company's data infrastructure too.

00:09:15: Yeah The days of the cfo deferring to IT on data rooms are over

00:09:19: Exactly because buyers are underwriting the data integrity now.

00:09:22: And they're looking for skeletons, Jonathan Watts issued a real warning about this for staffing businesses.

00:09:29: that applies everywhere he said.

00:09:31: high EBITDA simply won't survive due diligence if there is high founder dependency skeletons always surface in these deep dyes.

00:09:39: oh one hundred percent.

00:09:41: If the workflows aren't documented and systemized The valuation gets slashed.

00:09:45: Okay but I want to push back on This A bit or at least ask The old playbook in private equity was buy and build, right?

00:09:53: Right.

00:09:53: Now it's apparently by weight.

00:09:55: improve the data.

00:09:56: Kristoff-Totter noted that nearly seventy six percent of US buyouts are now add ons.

00:10:01: That's

00:10:01: a massive percentage!

00:10:03: Yeah,

00:10:03: so if the sponsors buying an already assembled platform from another sponsor at let say a thirteen X multiple they have to grow EBITDA by two point five x just hit their baseline returns.

00:10:13: but since the consolidation premium is gone because previous guy did roll up where does value creation actually come?

00:10:20: That is the million dollar question isn't it?

00:10:22: If you can't rely on multiple arbitrage anymore the value creation has to come from grueling, genuine operational improvement margin expansion implementing AI driving actual organic market share growth which

00:10:35: is way harder than just buying smaller companies with cheap debt

00:10:38: exponentially hard.

00:10:40: yeah and honestly it leaves us with a really big thought to mull over.

00:10:44: If the private equity landscape is permanently shifting from this high velocity trade and flip model to a hold an operate model, driven by these massive structural backlogs.

00:10:54: And the rise of patient capital.

00:10:56: are we witnessing The end of traditional private equity?

00:10:59: Wow!

00:11:00: Think about it.

00:11:01: what emerges might just be the birth Of A new decentralized corporate conglomerate era.

00:11:06: That is a fascinating way to look at it, complete evolution of the asset class.

00:11:10: Well on that note if you enjoyed this episode new episodes drop every two weeks.

00:11:14: also check out our other editions on PE value creation private equity fund raising venture capital M&A and strategy in consulting.

00:11:22: thanks so much for tuning-in.

00:11:23: we'll catch.