Best of LinkedIn: Private Equity: Value Creation CW 38/ 39

00:00:00: Provided by Thomas Alldrive and Frennus, based on the most relevant LinkedIn posts about private equity value creation in calendar weeks thirty-eight and thirty nine.

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00:00:28: So I want you to imagine a private equity firm dropping like half a billion dollars on AI implementation only To discover that their newest portfolio company is running its entire, you know multi-million dollar sales pipeline off A hidden spreadsheet called final version seven

00:00:45: Wow.

00:00:46: Yeah That Is a nightmare.

00:00:48: it really is.

00:00:49: The landscape of private equity is just fundamentally shifting beneath our feet right now and Our mission for this deep dive.

00:00:55: Is to unpack the absolute top trends in value creation being discussed across linkedin.

00:01:00: Yeah, we are looking at a pretty brutal new reality

00:01:04: exactly.

00:01:04: We're talking the new math of returns the harsh reality of hundred-day execution the shifting role of portfolio executives And well the unvarnished truth behind AI implementation.

00:01:15: I mean, if you look at the narrative connecting all these insights it really comes down to the death of financial engineering.

00:01:22: Okay unpack that a bit.

00:01:24: Well for a long time You could be just okay at operating your business But If you timed the market...you can rely on macro tailwinds right?

00:01:32: Just buy low and let the markets do their work.

00:01:34: Exactly!

00:01:35: You buy at ten X sell at fifteen X but That era is completely dead.

00:01:40: Operational alpha Is literally The only way forward.

00:01:43: now

00:01:44: Let's get into the actual math of that shift, because it is pretty staggering.

00:01:47: Anton Mungfak highlighted some macro data on this?

00:01:50: Oh!

00:01:51: The multiple expansion numbers.

00:01:52: Yeah So in twenty-twenty five, Multiple Expansion only accounted for eight percent of buyout returns

00:01:59: Just Eight Percent?

00:02:02: And before Fed raised rates It was sitting at forty per cent.

00:02:05: The market just refusing to do heavy lifting for sponsors

00:02:09: Right.

00:02:09: so when you strip away that cheap debt Your underwriting model has completely changed.

00:02:14: You can't just engineer your way out of a bad quarter.

00:02:16: Exactly, and Matt Hines and Sean Stevens brought up this concept regarding a recent Bain report.

00:02:23: their shorthand for This is so good.

00:02:25: they say twelve Is the new five

00:02:27: wait?

00:02:28: Twelve is The New Five meaning you need twelve percent growth to get what five percent used To Get you

00:02:34: Precisely deals that Used to Need Just A five Percent annual EBITDA Growth to hit a two point five X return.

00:02:41: Well, now they need ten to twelve percent growth.

00:02:44: That is a massive leap!

00:02:46: I mean hitting five percent is basically just keeping up with inflation and maybe pulling a few pricing levers?

00:02:53: Yeah but hitting twelve percent sustained.

00:02:56: that requires you to fundamentally reinvent the business especially with debt costing so much more.

00:03:02: The math is incredibly steep.

00:03:04: It really is And Joel Weber shared some data showing revenue growth accounts for fifty seven percent of value creation.

00:03:11: Fifty-seven percent.

00:03:12: Yeah,

00:03:12: that's nearly double what it was in two thousand nineteen.

00:03:15: Cost cutting has a floor.

00:03:17: You know the top line revenue is where three quarters of your return has to come from.

00:03:21: But okay Let me push back on that.

00:03:24: math sounds great On a spreadsheet sure but can operating teams actually deliver?

00:03:28: That kind of margin expansion In reality?

00:03:31: well Jordan hidden Actually gave us a huge reality check on this exact point.

00:03:36: What did they find

00:03:37: so?

00:03:37: Operational margin improvement is now driving over half of evident growth, but a staggering sixty-five percent have responded.

00:03:44: say they realize less than half the value identified in their value creation plans.

00:03:49: Less than half?

00:03:50: So...the opportunity's there!

00:03:52: But the execution capacity just failing?

00:03:55: Completely failing.

00:03:56: Operations are now THE single point at failure which means that pressure on first one hundred days is just immense.

00:04:03: Right And you see these highly polished hundred-day plans colliding with the messy reality of the organization.

00:04:09: Scott Peters noted something really interesting here, he said value creation rarely fails because the strategy was wrong.

00:04:16: It's the execution speed right?

00:04:18: Exactly it fails because execution wasn't fast enough.

00:04:22: He argues You need ruthlessly strict baselines a few KPIs and rapid leadership evaluation.

00:04:28: But Dr Sasha Hagenmuller brought in up pretty sobering reality check about those plans.

00:04:33: Oh, this statistic about the professionals?

00:04:35: Yeah.

00:04:35: Forty-two percent of professionals admit their own one hundred day plans are unrealistic.

00:04:40: Wow!

00:04:41: Almost half.

00:04:42: And poor data quality is second most common stumbling block in an exit.

00:04:46: It sounds like PE firms were designing a Formula One race strategy without checking if car actually has engine.

00:04:51: You know

00:04:52: That's great way to put it.

00:04:53: Like.

00:04:53: why these plan so totally disconnected from reality?

00:04:56: Well Dr Nor Salman identifies root cause perfectly.

00:04:59: She calls them unmodeled organizational assumptions.

00:05:03: unmodeled organizational assumptions.

00:05:06: What does that actually look like in practice?

00:05:07: Okay, think about it like this.

00:05:09: The financial model works perfectly.

00:05:12: It falsely assumes the organization has clear decision authority Accountability and information flow.

00:05:18: So it assumes the VP of sales Has the power to just enforce an eight percent price hike.

00:05:22: right

00:05:23: but In reality maybe the founder is been manually approving every client discount for twenty years.

00:05:29: Ah, so the model assumes that structure is there but it isn't.

00:05:32: Exactly!

00:05:34: Francisco Lara expanded on this too – he argues operational excellence isn't just a one-hundred day checklist.

00:05:40: Right you have to standardize discipline.

00:05:42: Yes

00:05:43: You need operators before the ink dries and build data infrastructure first.

00:05:49: Do your Michelle provided highly specific examples with IT integration?

00:05:54: The shadow spreadsheets?

00:05:55: Yes.

00:05:56: The integration plan might focus on a shiny new ERP, but the business is actually being run by hidden spreadsheet titled final v seven.

00:06:05: use this one that calculates commissions.

00:06:07: You literally can't execute a plan without understanding those shadow processes right

00:06:13: and really quickly.

00:06:14: if you're finding This breakdown valuable make sure you subscribe to this deep dive so you don't miss future editions.

00:06:19: It's the best way to keep up with these trends.

00:06:20: definitely

00:06:22: You know, going back to executing those complex data heavy one hundred day plans.

00:06:27: you really need the right leaders for that?

00:06:29: You do but PE firms are frequently hiring for the wrong things especially in The Finance Function.

00:06:36: Tim Garels talked about this.

00:06:37: Right Yeah!

00:06:38: The whole unicorn hunting concept.

00:06:40: Yes Sponsors demand these impossible candidates.

00:06:43: They want someone who can turn around drive double digit growth Do M&A Rebuild a team Manage a difficult founder

00:06:50: And I bet they want them traveling a hundred percent of the time, too.

00:06:53: Exactly!

00:06:54: It's just an impossible standard.

00:06:56: Mark Janssen zeroed in on how this impacts the CFO role.

00:06:59: He says PE keeps hiring for scale instead of velocity.

00:07:03: Oh dropping your Fortune-Five Hundred CFO into small portco?

00:07:06: Yes

00:07:07: They drop an executive who is used to twenty person FPNA team Into a sixty million dollar company where the ERP is ancient and cash has managed week to week.

00:07:17: Zachary Wingett actually got to the structural root of this failure.

00:07:21: What did he find?

00:07:22: Well, seventy-four percent of sponsors say their CFO is underperforming but it's an architecture problem not a talent problem.

00:07:29: Wait how?

00:07:29: so

00:07:29: if the operating team doesn't close margins weekly The monthly clothes ends up consuming eighty percent of the CFOs bandwidth.

00:07:37: So they spend all their time just trying to figure out what happened last month.

00:07:40: Exactly!

00:07:41: They can be strategic If data is a

00:07:43: mess But with hold periods stretching this seven years now, we saw that data from Jonathan O'Leary earlier.

00:07:49: How do you keep these burnt out executives motivated if the exit is nowhere in sight?

00:07:54: That's a big question and Robert Friedman highlighted an emerging trend here.

00:07:59: We are seeing new compensation structures moving away from traditional equity waterfalls.

00:08:05: So they aren't just waiting for an IPO.

00:08:08: Instead, some executives are getting an annual payment equal to a strict percentage say five percent of pure EBITDA.

00:08:15: Wait really?

00:08:16: Not EBITTA growth.

00:08:17: just pure EBITA

00:08:19: Just pure EBita.

00:08:21: it creates this immediate alignment without waiting for a liquidity event.

00:08:24: That's incredible!

00:08:26: It totally changes the incentive structure which aligns perfectly with Shannon Talbot rule-of-thumb

00:08:31: To upgrade selectively.

00:08:33: Yeah, always assess the talent and upgrades selectively before you just redraw the boxes on the org chart.

00:08:39: You have to get people an incentives right first.

00:08:41: Absolutely So if you have the right people.

00:08:44: The ultimate lever everyone is trying pull to get that ten-to twelve percent growth Is AI?

00:08:49: Oh definitely But there was a massive gap between conference buzz And actual deployment.

00:08:55: Guillermo Flore shared a staggering number about this.

00:08:58: Blackstone spend with the AI company Anthropic jumped twenty one X in a single year.

00:09:04: Yeah, from two point five million to five hundred and twenty-five million dollars.

00:09:09: This proves we are way past the pilot phase.

00:09:11: an into full scale enterprise deployment.

00:09:13: Wow.

00:09:13: But Steve Budd actually offered a reality check on that adoption.

00:09:17: Oh he noted that while seventy one percent of firms have adopted AI Only eighteen percent claim it is provided a durable advantage.

00:09:25: only eighteen percent.

00:09:27: yeah.

00:09:27: Why's it so low?

00:09:28: It's the ceiling holding everyone back, a total lack of structured data foundations.

00:09:32: Right?

00:09:33: Christopher Donito explained this failure rate perfectly.

00:09:36: he said.

00:09:37: ninety-five percent of AI pilots produce no measurable P&L impact.

00:09:41: Ninety

00:09:41: five percent is brutal!

00:09:43: Yeah... He says companies are just trying to dress up fundamental data quality problems in fancy A.I agent costumes.

00:09:49: That's a great visual and Philip Kraft highlighted The Human Risk Of Getting This Wrong.

00:09:55: What happened?

00:09:56: Well, he used Meta as an example.

00:09:58: They made the mistake of cutting headcount before redesigning the actual workflows...

00:10:03: ...they just assumed that AI would cover the gap?

00:10:05: Exactly!

00:10:06: The required sequence must be design first automate second measure third and only then let the organization in head count follow.

00:10:16: So if scattered pilots fail and premature cuts fail how does a PE firm actually scale AI across a massive portfolio?

00:10:24: Lucharan Chakrabati provided a model for this.

00:10:27: The winners are stopping the scattered experiments and building an AI factory!

00:10:32: An AI Factory?

00:10:34: Yeah,

00:10:34: it's a unified two-tier machine operating across the entire portfolio rather than each company trying to build it from scratch.

00:10:41: That makes total sense.

00:10:43: Centralize the heavy lifting

00:10:44: Exactly

00:10:46: Well looking at all of these I want leave you with final lingering question.

00:10:51: With PE hold periods lengthening, returns relying entirely on operating data and massive cross-portfolio AI deployments becoming the norm.

00:11:00: Are we witnessing end of traditional financial sponsor?

00:11:03: It's a fascinating question.

00:11:05: Will private equity firms in future look less like investment banks or more like giant highly integrated tech and software holding companies.

00:11:14: I guess will have to wait & see

00:11:15: If you enjoyed this episode, new episodes drop every two weeks.

00:11:19: Also check out our other editions on PE Fundraising, PE Exit Strategies Venture Capital M&A and Strategy & Consulting.

00:11:27: Thanks so much for joining us!

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