Best of LinkedIn: Private Equity: Fundraising CW 37/ 38

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

00:00:05: Fundraising insights in calendar weeks thirty-seven and thirty eight.

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00:00:21: Glad to be here.

00:00:21: So if you're working in strategy, M&A or investments right now... You really need to hear this!

00:00:27: We are breaking down some incredible insights from across LinkedIn and I mean the market has just fundamentally changed.

00:00:33: Oh

00:00:33: completely.

00:00:33: it's like a different universe out there right now compared to even a couple years ago.

00:00:38: Right

00:00:38: And our mission today is cut through the fluff.

00:00:41: look at what actually happening with private equity fundraising.

00:00:44: we talking capital concentration how LPs basically rewriting rules of due diligence The severe liquidity crunch and how family offices are just kind of going

00:00:54: rogue.

00:00:55: Yeah, going rogue is probably the best way to put it on so highly disruptive

00:00:58: It really is.

00:01:00: So let's jump right into our first theme which is this great fundraising divide.

00:01:05: The macro picture is wild because you know, we keep hearing that capitalists scarce

00:01:09: right the well as dry

00:01:11: exactly But it's not actually evaporating.

00:01:14: It's just heavily heavily concentrating at the very top.

00:01:18: Yeah, it's a massive structural shift.

00:01:19: JC shared some data on LinkedIn.

00:01:22: That just blew my mind.

00:01:24: he pointed out that fundraising has declined for like eight consecutive quarters.

00:01:30: But at the same time, these megafunds.

00:01:32: So funds raising over five billion dollars they are capturing roughly forty-five percent of all to global

00:01:37: capital which is just a staggering number.

00:01:40: it Is.

00:01:40: and get this those mega funds make up less than five percent Of the total number of funds out there.

00:01:45: Wow yeah I mean The math on that is frankly terrifying if you're You know amid market firm.

00:01:50: Yeah who were basically fighting over scraps while?

00:01:54: Five percent of the market takes half the chips off the table

00:01:57: right.

00:01:57: And Edward McKenzie, Pemberton Whiteley and Sonia Kay actually highlighted a perfect real-world example of this with Goldman Sachs.

00:02:05: Oh yeah the recent numbers they pulled were huge.

00:02:07: Insane numbers!

00:02:08: Goldman just raised eleven point seven billion dollars across their alternative platforms right?

00:02:14: And nine point six billion of that went strictly to their flagship fund.

00:02:18: so it really proves that capital is just blindly following established scale right now.

00:02:23: well in its flight to safety basically Aves Anderson made this exact observation on LinkedIn.

00:02:28: He was pointing out that the people getting absolutely crushed right now are the mid-sized incumbent managers

00:02:34: because they can't return cash

00:02:35: exactly.

00:02:36: it comes down to DPI which is distributed to paid in capital.

00:02:39: These midsize managers have low DPI, meaning they haven't actually returned meaningful cash to their LPs.

00:02:45: Right?

00:02:45: They just have paper returns.

00:02:47: Exactly TV PI the paper returns.

00:02:49: that doesn't buy you anything.

00:02:50: so LP's are cash-starved...they can't make new commitments because their money is tied up.

00:02:56: So when they finally do scrape together some fresh capital they're not going risk it on a midmarket guy who just locked out there cash for last five years.

00:03:03: No!

00:03:04: They retreated to the massive legacy brand.

00:03:07: It buys them automatic credibility with their own investment committees.

00:03:12: Yes

00:03:13: Nobody gets fired for investing in Goldman Sachs,

00:03:15: right?

00:03:16: it honestly reminds me of the blockbuster movie strategy we see in Hollywood.

00:03:19: Well

00:03:20: that's a good comparison.

00:03:21: Yeah like a studio could fund ten really innovative mid-budget movies That you know might yield a massive return.

00:03:29: well they can totally flop

00:03:30: Exactly.

00:03:31: So instead of taking that risk, they just pour every single dollar into one massive superhero franchise sequel.

00:03:37: because even if the margins are tighter it's a safe known entity.

00:03:42: It de-risks the decision for the executives.

00:03:44: yeah

00:03:44: But let me push back little here.

00:03:46: is this concentration?

00:03:47: Just a private equity thing?

00:03:48: or are we seeing this elsewhere?

00:03:50: Oh no its everywhere.

00:03:51: look at private credit.

00:03:52: Jordan Panette brought this up and arguably concentrating even faster there.

00:03:56: Really?

00:03:57: Oh, yeah!

00:03:58: He highlighted that the top twenty-five firms captured nearly seventy five percent of all fundraising in private credit.

00:04:03: Seventy

00:04:04: five

00:04:04: percent?!

00:04:05: That's wild!

00:04:07: Yeah and heirs just closed this record breaking.

00:04:09: seventeen billion euro European Private Credit vehicle I mean for M&A professionals...that completely rewires how deals get done

00:04:19: Right, because the mega managers are just acting as these one-stop shops for massive debt packages.

00:04:24: Exactly!

00:04:24: It freezes out to smaller syndicates completely.

00:04:27: it's a total winner takes all environment right now

00:04:30: Which transitions us perfectly into our second theme.

00:04:33: Because if capital is this consolidated and LPs suddenly have all the leverage.

00:04:40: They

00:04:40: absolutely hold all the cards right now

00:04:42: and we are seeing how they Are using that leverage to completely overhaul their diligence frameworks.

00:04:47: I mean, they're not just looking at a historical return profile anymore like The bar for conviction is just so much higher.

00:04:53: Well,

00:04:53: they can't rely on historicals any more.

00:04:55: Michael Jensen had a really great post about this.

00:04:58: LPs are deeply questioning the relevance of historical track records

00:05:01: because the environment Is totally different.

00:05:03: exactly.

00:05:04: think about how returns were generated over the last decade.

00:05:07: You had cheap leverage near zero interest rates, and you could just assume multiple expansion.

00:05:12: Right a GP Could buy a company at ten times earnings do literally nothing And sell it for fifteen times Just because the market was hot.

00:05:21: but those conditions are gone.

00:05:23: so LPs are asking okay We see your pass returns But how did you actually generate them?

00:05:28: Mm-hmm does that strategy work today with debt costs basically doubled.

00:05:32: And honestly, LPs have a right to be skeptical.

00:05:35: Ramute Agarshan shared some research from State Street.

00:05:38: that was pretty eye-opening.

00:05:39: The S&P five hundred comparison?

00:05:40: Yes!

00:05:41: Private equity actually underperformed the S& P Five Hundred recently.

00:05:45: Wow Yeah.

00:05:45: and they attribute it directly to these cyclical pressures.

00:05:48: you know higher debt costs lower exits...the death of multiple expansion

00:05:52: Right.

00:05:52: so the financial engineering model is basically dead completely

00:05:55: alpha Actually has to be earned now through genuine operational value creation.

00:06:00: And that requires a totally different skill set.

00:06:03: Jarda Molinar posted about a panel in Amsterdam, and the main takeaway from the LPs was that sure financials are important but they're just table stakes now.

00:06:12: LPs are demanding a distinctive story!

00:06:14: They want to know do you have true alignment with our ambitions?

00:06:19: Do proprietary operational expertise in, say healthcare diagnostics.

00:06:25: You can't just be a generalist with the spreadsheet anymore?

00:06:27: Exactly!

00:06:28: If you don't have a specific angle they just walk away.

00:06:31: Let me ask your practical question though if LPs are scrutinizing?

00:06:37: Are they also tightening up on the actual operational and legal risks of the GPs themselves?

00:06:42: Oh, absolutely.

00:06:44: Justin Grazanovist noted this fascinating shift where institutional LPs now expect to see a really robust general partnership liability insurance program...

00:06:53: Wait!

00:06:53: GPL

00:06:53: Insurance?!

00:06:54: Yeah

00:06:54: during diligence They want to see that the GP is safeguarded against claims of fiduciary breach or you know failure-to-execute business plans.

00:07:01: Wow so they are basically stress testing the corporate structure of the GP itself.

00:07:06: Exactly They are terrified of risk.

00:07:08: So they want a financial backstop just in case the GP faces litigation.

00:07:12: Everything's being de-risk.

00:07:13: that is intense.

00:07:14: quick side note for everyone listening.

00:07:16: if you're finding this deep dive useful For your own deal flow Just take a second to subscribe so you don't miss our future additions on private markets intelligence.

00:07:24: Good call,

00:07:25: so moving to our third theme This all connected right LPs or demanding more because their capital is trapped Which brings us to the severe liquidity crunch and The frankly pretty creative alternative release valves GPs are using now.

00:07:41: Yeah, that traditional exit routes or just clogged

00:07:44: completely clogged IPOs are slow.

00:07:46: sponsor-to-sponsor buyouts are dragging.

00:07:49: Jordan Barnett shared some data showing that PE distributions have hit record lows for four straight years.

00:07:54: Four straight years

00:07:57: It is.

00:07:58: You sign up for a ten-year lockup and suddenly it's year thirteen, And you still can't get your cash out Right.

00:08:02: So the secondaries market is absolutely exploding.

00:08:05: Barnett forecasted to exceed two hundred fifty billion dollars.

00:08:08: as LPs just resell their stakes To get some liquidity.

00:08:12: We are seeing massive institutional scale there.

00:08:14: Tryda Boudia highlighted that Adam's trade partners Just secured over five billion dollars For their latest secondary program.

00:08:22: Five billion?

00:08:24: It proves how massive this shift is, but you know secondaries mean LPs usually take a haircut on their NAV.

00:08:31: Right

00:08:32: nobody wants to sell at a discount

00:08:33: exactly.

00:08:34: so GPs are trying to find other ways which Is why continuation vehicles or CVs?

00:08:40: Are booming.

00:08:41: ah yeah will.

00:08:42: Shriver had a great specific example of this.

00:08:44: Peterson

00:08:44: Partners, right?

00:08:45: Yeah they closed a five hundred and ten million dollar single asset CV for Kelso Industries.

00:08:50: Right.

00:08:50: so they take one really good asset move it out of the old fund And put into a new vehicle.

00:08:55: Exactly

00:08:55: It lets the GP hold the asset and pursue more M&A But gives the existing LPs A choice to Take liquidity if They want it.

00:09:03: yeah its kind Of like.

00:09:05: okay think of Like This.

00:09:06: Its like a gp saying hey We bought this house together we love The House.

00:09:10: we don't Want To sell it to a stranger just yet because appreciating.

00:09:13: Okay, so let's just refinance it ourselves and if any of the current roommates want to move out and take their cash they can And we'll just bring in new roommates.

00:09:22: I love that analogy but The critical thing there is that?

00:09:26: New roommates are paying today's market rent right.

00:09:30: They are buying-in at the new mature valuation.

00:09:34: So it resets the clock for the GP and more importantly It resets their fee structure and they're carried interest.

00:09:41: Oh, of course!

00:09:42: Which is why LPs scrutinize these CVs so hard.

00:09:45: They want to make sure the GP isn't just locking in a payday while leaving new LPs with all the execution risk.

00:09:51: That makes total sense.

00:09:52: And Steven Starr made an interesting observation about how this impacts the broader market.

00:09:56: Fun Finance has having to completely evolve to support this.

00:09:59: How's that?

00:09:59: Well it used be traditional subscription lines you know short term bridging But now lenders are structuring complex facilities specifically around CVS funds and securitizations.

00:10:09: Wow!

00:10:10: Yeah, they're having to build entirely new financial plumbing just to attract these heavily constrained investors.

00:10:16: It is wild how much engineering goes into Just generating some cash.

00:10:22: But you know while the institutions are dealing with all that plumbing There's another group Entirely That Is Just Refusing To Play The Game.

00:10:29: Yes...The

00:10:30: Family Office Flex.

00:10:31: This is our fourth theme, and honestly it might be the most disruptive.

00:10:35: I agree!

00:10:35: Family offices are just aggressively bypassing The Traditional Blind Pool Fund—they're taking matters completely into their own hands.

00:10:43: Province Sonanthan shared a stat that made me do a double take.

00:10:48: He noted that ninety-two point seven percent of newly formed family offices in twenty-twenty six Are prioritizing direct investments over commingled funds.

00:10:58: Almost ninety three percent.

00:11:00: That is a total rejection of the standard model.

00:11:02: It really is, and it makes sense when you think about it.

00:11:04: these are first-generation wealth creators.

00:11:06: they built successful businesses themselves.

00:11:08: They absolutely despise giving up control to a GP and waiting ten years for a payout

00:11:12: Plus.

00:11:13: they hate the fees.

00:11:14: Why paid two in twenty?

00:11:15: For a blind pool When you don't even know what they're gonna buy

00:11:17: exactly?

00:11:18: And Hendrik Jordan provided What Is Probably The Ultimate Proof Point Of This Whole Trend DFO management, which is Michael Dell's family office.

00:11:26: They recently partnered on a massive seven point seven billion dollar all cash.

00:11:32: take private of Baldwin Insurance Group.

00:11:34: Seven

00:11:35: point seven Billion

00:11:36: All cash.

00:11:37: And they did it by completely bypassing traditional PE sponsors, unbelievable.

00:11:41: instead They partnered directly with an AI focused holding company So they basically engineered their own bespoke operational partner to get the deal done

00:11:50: which is brilliant because historically The knock on family offices was that they lapped the deep Operational infrastructure that a mega fund has

00:11:58: right?

00:11:58: They just had the money not the team

00:11:59: exactly.

00:12:00: but now they are solving for them And Mark J. Sharpe brought a great point on this, family offices are now directly competing with private equity firms for top talent.

00:12:08: Oh

00:12:09: yeah the war of talent is fierce.

00:12:10: They're luring away senior M&A bankers in top tier MBAs.

00:12:14: Yeah

00:12:14: and they do it by offering them co-investment ownership stakes and carry onto deal by deal basis way earlier in their careers than a standard mega fund would.

00:12:23: So they are weaponizing their flexibility to build these institutional grade teams internally

00:12:29: Precisely.

00:12:29: so let me ask you this then If family offices are building in-house talent, sourcing their own deals and executing seven billion dollar take privates.

00:12:40: Are the lines between a family office an buyout shop effectively gone?

00:12:44: I mean for the largest single family offices The line is completely gone.

00:12:48: They're not LPs anymore they arrival sponsors.

00:12:51: if you were running a sell side process today They have to be on your buyer list.

00:12:55: Wow, and they actually have a distinct advantage.

00:12:57: They have patient capital.

00:12:59: They don't have a fun life cycle forcing them to sell in the down market right?

00:13:02: They can just hold

00:13:03: exactly but it brings up A really provocative thought when you look at the whole picture we've discussed today.

00:13:07: what's

00:13:07: that?

00:13:08: well You Have Capital concentrating in massive megaphones at the very top.

00:13:12: Right.

00:13:13: And then, at the bottom you have family offices going direct and completely bypassing the funds.

00:13:18: Yeah

00:13:18: The squeeze is coming from both

00:13:19: sides Exactly.

00:13:21: So what happens to the traditional mid-market private equity firm over the next five years?

00:13:26: They are completely caught on a crossfire.

00:13:27: they are.

00:13:28: Well, they have become hyper specialized just to survive like focusing strictly on niche sectors where they hold undeniable operational alpha.

00:13:36: or are they literally facing extinction?

00:13:38: Man, that is a heavy question for anyone in the mid-market right now.

00:13:42: It's definitely something every strategy investment professional needs to be underwriting and their plans

00:13:46: about it out.

00:13:47: well this has been an incredibly eye opening.

00:13:50: dive into the data if you enjoyed this episode.

00:13:53: new episodes drop every two weeks.

00:13:54: also check our other editions on PE value creation PE exit strategies venture capital, M&A and strategy in consulting.

00:14:03: Thank you so much for joining us.