Best of LinkedIn: Private Equity: Exit Strategies CW 38/ 39

00:00:00: provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about private equity exit strategies insights in calendar weeks thirty-eight and thirty nine.

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00:00:19: And yeah let's just jump right in.

00:00:22: There is this distinct sound running in the background of any traditional private equity deal.

00:00:27: Oh absolutely

00:00:28: It's The Ticking Clock That classic five to seven year whole period.

00:00:32: Yeah,

00:00:32: exactly

00:00:33: the timer starts this second The Wire hits.

00:00:35: so for today's deep dive our mission is unpacking these top private equity exit strategy trends popping up across LinkedIn right now.

00:00:43: Right because the fundamental math of traditional PD Is well it's basically breaking down

00:00:48: totally breaking and we're gonna look at how the smartest players are surviving This with aggressive operational offense ruthless data readiness and permanent capital.

00:00:59: Yeah, but I mean we really have to anchor this in the macro reality first.

00:01:03: You can't even talk about exit strategies right now without acknowledging that

00:01:09: is stretching fund structures to the limit.

00:01:15: Oh, for sure!

00:01:16: Just look at data Montserrat-Fermoso recently highlighted.

00:01:19: there are currently uh... sixteen thousand companies sitting in portfolios that have been held over four years.

00:01:26: Sixteen

00:01:27: thousand?

00:01:28: Yeah That represents fifty two percent of total buyout inventory.

00:01:31: globally The Avertold period has stretched out a record high six point six year now.

00:01:37: I mean Mark Kuching put timeline on back long.

00:01:39: it genuinely stopped me my tracks.

00:01:42: He pointed out that if we maintain the current transaction pace, it would take eleven years just to clear that existing inventory.

00:01:49: Eleven years of clearing house activity.

00:01:52: and that's assuming no new deals are added to the pile which is crazy!

00:01:55: Right... Waiting for rates drop further or multiples magically expand?

00:02:00: It's not longer a viable strategy for GPs.

00:02:02: when standard hold morphs into seven year lockup The entire conversation at LP advisory committee changes.

00:02:08: Yeah let's pause on that because If hold periods are stretching to seven years, doesn't that just fundamentally blow up the original IRR math that sponsors promise their LPs?

00:02:19: Like.

00:02:19: Just from The Time Decay alone?

00:02:21: Oh it shatters the model entirely.

00:02:23: Oksana A Ismailova broke this down perfectly.

00:02:26: if you underwrite an asset for a year five exit targeting say twenty percent IRR And then you are forced to hold that exact same asset until your seven, clearing the exact same exit proceeds.

00:02:38: Your IRR drops to fourteen percent.

00:02:40: just

00:02:41: from waiting

00:02:41: exactly time alone destroys the economics.

00:02:44: The numerator is static but your denominator is dragging out.

00:02:48: You're locking up LP capital for an extra two years without generating proportional new enterprise value

00:02:54: and the asset itself might be perfectly healthy.

00:02:56: You know the operations or sound But the financial economics of the investment have gone completely stale.

00:03:01: But I mean, looking at the volume of continuation vehicles right now.

00:03:05: It seems like some mega funds are doing everything they can to mask this reality.

00:03:09: Oh completely

00:03:10: Swapnel.

00:03:10: John Hulukar was highlighting This.

00:03:12: Sponsors Are Taking Assets They Can't Offload The Strategics Or Other Sponsers And They're Essentially Selling Them From Their Left Pocket

00:03:20: To their Right Pocket.

00:03:21: Yeah!

00:03:21: The Synthetic Exit

00:03:22: Exactly.

00:03:23: You Spin Up A CV Transfer The Asset Over Grab a Fairness Opinion To Markup The Valuation and Suddenly you Declare A Liquidity Event.

00:03:31: Right, but LPs are looking at this very cynically.

00:03:34: It's a manufactured liquidity event on the spreadsheet that generates GP carry But there is no net new external cash entering the building

00:03:42: Which perfectly explains Ignacio Gallardo-Negas' observation.

00:03:46: He pointed out that DPI Distributions to Paid in Capital has utterly replaced IRR as The metric That actually matters.

00:03:55: Because you can't distribute A theoretical return rate.

00:03:58: LPs need actual cash so they can recycle it into the next vintage.

00:04:02: When DPI dries up, fundraising for the GP's Next Flagship Fund hits a brick wall.

00:04:07: So if financial engineering is dead and cheap floating rate debt isn't coming back to save the MOIC.

00:04:13: sponsors are trapped.

00:04:14: They have to rely on pure operating performance.

00:04:17: Yeah

00:04:18: And before we get in do exactly how they're doing that Real quick.

00:04:22: If you're finding this breakdown useful for your own portfolio strategies, make sure to subscribe.

00:04:47: It

00:04:49: fundamentally changes the profile of the Portco CFO you need too.

00:04:53: Mark Janssen had a great analogy for this, he said if your playbook as a CFO is just holding a pair of scissors to cut travel budgets...you're a mechanic!

00:05:02: And PE needs race car drivers right now?

00:05:05: Exactly!

00:05:06: Cost-cutting is just a defensive posture.

00:05:08: You can't cost.

00:05:09: Cut Your Way To A Three X Return…

00:05:11: You have to play offense.

00:05:13: The top CFOs are digging into pricing power.

00:05:15: To find that, two percent optimization that drops straight to the bottom line.

00:05:20: they're hyper focused on working capital velocity.

00:05:23: Liberating trapped cash from inventory to fund add-on M&A without having to draw down an expensive revolver!

00:05:29: Right.

00:05:30: And a massive piece of this new operational offense is AI.

00:05:33: but um...the application entirely different than the hype cycle suggests.

00:05:37: Yes, Lee McCabe pointed this out.

00:05:40: Everyone wants flashy AI-native deals but the highly reliable private equity money is actually in boring AI adoption.

00:05:48: This distinction is so critical.

00:05:50: It's not about acquiring an AI startup at fifty times revenue.

00:05:54: it's about taking the dull labor heavy platforms you already own and using AI to fix workflow bottlenecks

00:06:01: Right.

00:06:01: Using AI inside existing EBITDA.

00:06:04: Like take a residential HVAC roll up.

00:06:08: If you use AI for dynamic route optimization, your reduced truck rolls say fuel

00:06:12: and increased technician utilization Yeah.

00:06:15: or a health care services business.

00:06:16: using AI for clinical scheduling You are removing that cheerful spreadsheet chaos.

00:06:22: That usually sits underneath these businesses.

00:06:24: Mechanically if you can deploy boring AI to lift operating margins by three hundred basis points That is a highly defensible value creation lover

00:06:31: vastly superior to chasing an AI asset where the competitive moat could evaporate tomorrow and buyers are actively hunting for this capability.

00:06:39: Bobna Dewan noted that AI exposure is no longer just an upside narrative.

00:06:44: It's a core component of due diligence.

00:06:46: Exactly, it dictates the multiple you pay at entry And it anchors the equity story when you exit

00:06:51: Assuming you can actually execute the exit right?

00:06:54: Because once you've run the offense... ...and that exit window finally cracks open You have to prove your value instantly to buyers

00:07:01: Which brings us to Exit Readiness.

00:07:03: Yeah which feels like buzzword that is dangerously misunderstood by most management teams.

00:07:08: They think it just means setting up a virtual data room.

00:07:11: Madea Raja put this perfectly, true exit readiness is continuous reconciliation.

00:07:16: It's not as status you achieve by scrambling for six weeks before the process kicks off

00:07:20: Right keeping the financials pristine The entire hold period because when that Data Room opens the buyers quality of earnings team Is going to rip everything apart.

00:07:29: You cannot be doing months of deferred reconciliations in one expensive block, and buyers are actively stress-testing this.

00:07:36: Jordan Nelson shared the cutthroat metric.

00:07:39: Buyers literally time how fast a company answers data question.

00:07:43: Oh I love that.

00:07:44: It's brilliant proxy for systemic risk.

00:07:46: it really is

00:07:47: If a buyer asks granular data on net revenue retention by cohort And takes your finance team six weeks backflips to answer?

00:07:55: They know you had custom build that metric

00:07:58: Right But if you have it the next day, they know you actually use that number to run your business.

00:08:03: That speed directly impacts the purchase price.

00:08:05: Failing that li-fire test has catastrophic consequences.

00:08:10: Dr.

00:08:10: Juergen Schneider shared a staggering real world example of this.

00:08:14: Oh!

00:08:14: This one is brutal.

00:08:16: So... It's a board meeting for a Swiss biopharma company right?

00:08:20: The lead investor asks A very straightforward liquidity question What does the cash burn buffer ratio?

00:08:27: And there are twelve people in that boardroom.

00:08:29: Five of them hold CFO titles, and they're just absolute radio

00:08:34: silence.".

00:08:35: You kidding?

00:08:36: Nobody knew the answer!

00:08:38: So the investor politely nods... ...and immediately drops the proposed exit multiple from eight X down to five

00:08:45: X. Thirty-five million dollars in enterprise value… Just evaporated on this spot Because if you cannot state your cash metrics in thirty seconds, You have a massive operational liability.

00:08:57: It signals that the underlying financial controls are fundamentally broken.

00:09:02: But I mean is data The only thing That kills multiples or Is there A human element to this too?

00:09:07: Oh!

00:09:07: The Human Element is arguably worse Tim Wise provided the Data on This.

00:09:11: Founder.

00:09:12: dependency is the ultimate multiple killer

00:09:15: because Buyers Are paying for the transferability of the Revenue.

00:09:18: What can the business do without the founder In the building?

00:09:21: Exactly.

00:09:22: If the founder is chief problem solver and main rainmaker, that dependency mechanically pulls down the exit multiple by three to four turns of EBITDA.

00:09:30: Wow!

00:09:31: Three-to-four turns?

00:09:32: On a three million dollar EBITTA business... That's nine to twelve million dollars walking out door.

00:09:37: Simply because value isn't transferable….

00:09:40: So looking at whole picture – Standard hold period stretching seven years IRR decaying CV exits Intense exit readiness pressure.

00:09:48: The machinery is punishing everyone,

00:09:51: which naturally leads to capital routing around the problem.

00:09:55: We are seeing a major trend toward alternative paths to liquidity basically escaping the traditional private equity clock entirely.

00:10:03: Keith Richmond highlighted a fascinating transaction on this sequence holdings and Michael Dell's family office bought Baldwin group for seven point seven billion dollars.

00:10:11: but they used permanent capital.

00:10:13: I mean, I have a hard time believing LPs wouldn't want the discipline of traditional fund structure on a seven point seven billion dollar deal.

00:10:21: Right but when you look at this strategy it makes perfect sense.

00:10:24: The reason they require permanent capital goes back to what we said about AI.

00:10:27: Real technological transformation is incredibly messy.

00:10:31: You have rewrite workflows retrain thousands people J curve is severe

00:10:36: And payoff very likely land well outside constraints standard five year.

00:10:41: hold

00:10:42: Traditional PEs like house flipping, right?

00:10:44: You're always stressed about the timeline and market at that exact moment of sale.

00:10:48: Permanent capital is buying a generational estate.

00:10:52: You can tear it down to studs because you never have move.

00:10:57: You compound enterprise value without an exit clock running out.

00:11:00: Nicola Ebbmeyer noted very similar strategy playing with bending spoons.

00:11:05: Right, they acquire cash-rich tech companies with stagnant growth.

00:11:08: They heavily optimize them and just hold them forever—they have zero intention of ever flipping

00:11:13: them.".

00:11:13: And founders are catching onto these alternative structures too!

00:11:16: Michael Chason pointed out the massive rise in independent buyouts or IBOs.

00:11:21: In an IBO, founders use exact same leverage that PE firms used to create liquidity but don't hand over majority control

00:11:28: Because The Dirty Secret Of PE Buyouts That Founders Are Waking Up To Is The Earn Out Failure Rate.

00:11:34: On average, only twenty-one percent of the promised earn out actually gets paid.

00:11:39: The headline valuation looks incredible but back end economics rarely materialize.

00:11:44: IBOs allow the founder to take chips off table today while staying in driver's seat.

00:11:49: If we pull all these moving pieces together... We arrive at a genuinely provocative realization There is over a trillion dollars in private equity dry powder sitting on sidelines that GPs are structurally required

00:12:03: But simultaneously hold.

00:12:05: periods have blown out past six years zero interest rate debt is gone and multiple expansion Is dead, right?

00:12:12: So the question we have to leave you with today.

00:12:14: It's this as We enter an era that requires deep long-term technological transformations To generate real value is The classic five two seven year PE fund structure actually becoming an outdated financial product?

00:12:28: Yep it all comes back to the clock.

00:12:30: The smartest players aren't trying to beat the timer anymore, they're just unplugging it.

00:12:36: If you enjoyed this episode new episodes drop every two weeks.

00:12:39: Also check out our other additions on PE value creation private equity fundraising venture capital M&A and strategy in consulting.

00:12:47: Thanks for joining us on this deep dive And remember to subscribe so you never miss an addition.