Best of LinkedIn: Private Equity: Fundraising CW 41/ 42

00:00:00: Provided by Thomas Allgaier and Frannis, based on the most relevant LinkedIn posts about private equity fundraising insights in calendar weeks forty-one and forty two.

00:00:09: Frannes supports PE back manufacturers with market intelligence needed to unlock revenue from idle production capacity.

00:00:15: You can find more info in description.

00:00:18: So imagine looking at a portfolio dashboard right?

00:00:20: And it says you are up fifty percent.

00:00:23: on paper

00:00:23: Sounds great Yeah

00:00:24: Right.

00:00:25: But then The capital call comes in for the next deal and you realize, You don't actually have cash on hand to fund it.

00:00:31: Oh wow!

00:00:32: Yeah that is... That's the exact liquidity crunch.

00:00:36: A massive chunk of limited partners are staring down right now.

00:00:39: Exactly

00:00:40: So.

00:00:41: todays deep dive Is really built For those who view On-the-front lines Of this market.

00:00:44: You know strategy M&A And investment professionals Because the days of cheap debt Just sort masking operational flaws.

00:00:51: Those Are gone.

00:00:52: We're looking at a Fundamentally altered ecosystem.

00:00:55: here

00:00:55: We really are.

00:00:56: And we're going to map out exactly how structural this shift is, um...we're unpacking the top private equity insights from across-the market Really looking at how allocators are reacting to this cash freeze.

00:01:07: Yeah

00:01:07: So will get into harsh reality of current fundraising environment.

00:01:11: The massive pivot toward co-investments.

00:01:13: Why continuation vehicles suddenly

00:01:15: just

00:01:16: everywhere?

00:01:17: And sophisticated way sponsors our manufacturing alpha.

00:01:21: Now that multiple expansion basically off the table.

00:01:24: Right, let's start with a macro picture then because the data paints a story of extreme bifurcation.

00:01:30: If you just look at the top line numbers things seem fine.

00:01:33: like Vincent Schneider recent data cut shows that private equity capital raise is actually up five percent year to date in twenty-twenty six.

00:01:40: Up five percent?

00:01:41: Yeah sitting out roughly four hundred forty five billion dollars.

00:01:45: but if you peel back just one layer buyout fundraising just hit

00:01:52: Because the capital isn't disappearing.

00:01:53: It's just it's clustering at the absolute top of the food chain scale has basically become a safe haven.

00:01:59: Yeah, for sure

00:02:00: frister have been noted that eqt advent and cdnr are each targeting twenty six billion dollars or more For their current flagships.

00:02:08: Twenty-six billion

00:02:10: is insane.

00:02:10: That's insane

00:02:11: I know right?

00:02:12: And Casper Clem pointed out that six major infrastructure in energy transition funds swept up sixty four billion dollars In just thirteen weeks.

00:02:20: I mean, Blackstone alone closed an eight point seven billion dollar energy transition fund.

00:02:25: So if you're a mega cap manager allocators are absolutely writing the checks.

00:02:30: but wait If just a handful of massive funds or vacuuming up You know eighty or ninety billion dollars in a single quarter that has to be Absolutely starving The rest of market?

00:02:40: What happens To the mid-market sponsors who usually rely on those same pools?

00:02:43: Well

00:02:44: they Are hitting a wall.

00:02:45: Jed Johnson's data illustrates the fallout perfectly.

00:02:49: Mid-market funds, so in the hundred million to five billion dollar range.

00:02:53: They just saw a forty three percent drop and capital raised.

00:02:56: Ouch Which brings?

00:02:58: A very real human cost to these smaller firms.

00:03:00: by The way David Harmeyer highlighted a recent breakdown showing that firms managing under fifteen billion dollars are actively bleeding talent.

00:03:09: yeah That makes sense.

00:03:10: Take new state capital partners as an example.

00:03:13: A third of their staff walked out the door recently because they're twenty eighteen.

00:03:16: Fun Two is trapped in this exact liquidity freeze.

00:03:20: They have a reported TV PI up one point five zero X which you know looks solid on a pitch deck, right?

00:03:26: Looks great on paper

00:03:28: But the actual DPI The cash hitting the LPs accounts is only point three nine X. So the carry clock is ticking that cash isn't moving and the talent just doesn't stick around to manage zombie assets.

00:03:40: And this is the core issue driving everything else we're going to discuss today.

00:03:44: LPs cannot pay their beneficiaries with paper marks, a GP can carry a business at a premium for five years and call it a win on their internal books.

00:03:53: but the market is heavily, heavily discounting AUM as a metric for success.

00:03:58: Nathan Resnick framed us really well.

00:03:59: he said DPI is the only unassailable truth.

00:04:02: right now.

00:04:03: AUM just shows how many assets you have trapped in the portfolio

00:04:07: or

00:04:07: How aggressively you marketed your last fundraise.

00:04:10: So basically AUM is a vanity metric, like having million social media followers but no sales while DPI is the actual cash hitting the register.

00:04:19: Exactly and because LPs are demanding DPI so aggressively GPs resorting to financial engineering to manufacture it.

00:04:26: Like Cesar Estrada warned about rising use of nav loans in dividend recaps

00:04:31: Oh man, yeah.

00:04:33: This is where allocators have to be incredibly sharp because a NAV loan fundamentally alters the risk profile of a fund.

00:04:39: Right.

00:04:40: walk us through the mechanics that

00:04:41: Okay.

00:04:42: so for those tracking this A GP takes out massive loans against remaining equity in entire portfolio.

00:04:48: They use borrowed cash issue distribution to LPs.

00:04:52: So the LP sees a cash deposit and thinks great!

00:04:55: Realization

00:04:56: Exactly, but the GP hasn't actually exited any underlying companies.

00:05:00: They have just layered expensive portfolio level debt onto businesses that might already be struggling to serve as their operating leverage in a high-rate environment.

00:05:09: I mean it is essentially taking out of mortgage to pay off a credit card

00:05:13: Which is exactly why diligence has taken so much longer?

00:05:17: and while raising a debut fund isn't absolute nightmare right now LPs are digging into the attribution of every single dollar return.

00:05:24: Yeah, the manathon raising a small fund one right now is terrifying.

00:05:28: Looking at Eric Cheese breakdown for a twenty-five million dollar debut vehicle you don't just syndicate a few deals with former colleagues anymore.

00:05:35: No not all.

00:05:36: You need to targeted top of funnel pipeline of one thousand potential LPs.

00:05:42: Out of those thousands might get three hundred first meetings.

00:05:44: That grinds down to one hundred and fifty follow ups.

00:05:47: Thirty five groups who actually run real diligence And you are left with maybe twenty-five actual commitments at a million bucks apop.

00:05:54: Wow!

00:06:14: families specific trust structures, there were state planning timelines and liquidity constraints before they even asked for capital.

00:06:21: So if LPs are trapped in these older vintages without cash And their terrified of GP's artificially engineering distributions with nav loans They really only have one move left right?

00:06:33: Taking the steering wheel themselves

00:06:34: Right

00:06:35: Which explains The absolute explosion In co-investments we're seeing.

00:06:41: USUN and Troy T. Hebert shared that private equity co-investments hit a staggering one hundred ninety eight billion dollars in just the first half of twenty twenty six.

00:06:50: That's massive.

00:06:51: It is, it has more than double volume.

00:06:53: year over year.

00:06:55: LPs are basically bypassing their traditional blind pool model.

00:06:59: They want granular control over when where they're capital is deployed And obviously...they want structural fee savings to come with.

00:07:07: Yeah, Arn Mialosa put a perfect bow on this.

00:07:10: His core thesis is that more than half of what is happening in private markets today can be explained by the simple fact That capital is not coming back to LPs.

00:07:19: It really is the gravitational pull of the entire asset class right now and By the way if you want to make sure you catch our future deep dives tracking these structural market shifts Just take a second to hit subscribe

00:07:31: Right but hold on.

00:07:32: I have a major issue with this co-investment frenzy though.

00:07:36: okay?

00:07:36: Let's hear it.

00:07:37: If a GP is syndicating massive equity check that can't swallow, isn't there an inherent adverse selection risk for the LP?

00:07:45: The GP will naturally offload the most capital intensive, riskiest bets onto co-investors.

00:07:51: And most LPs simply don't have internal operating partners to properly underwrite these specific assets!

00:07:59: Look at Jalosa's reference on the four billion dollar plural site wipeout – you had major sovereign wealth funds and pensions taking absolute baths on a co-investment because they just trusted the sponsors underwriting.

00:08:11: It's a massive vulnerability, I agree.

00:08:13: Stepping into a co investment without an institutional great sector team is playing with fire but smaller investors are finding ways to mitigate that risk structurally

00:08:22: also

00:08:23: well.

00:08:23: Nicola Vukovic pointed out that family offices and smaller allocators are actively avoiding those mega syndication black holes.

00:08:30: Instead, they are building highly concentrated portfolios alongside niche GPs and independent sponsors.

00:08:37: That way that can actually verify the operational thesis themselves rather than just acting as dumb capital filling a syndication

00:08:43: gap."

00:08:45: Which opens the door for strategies like midlife co-investments.

00:08:48: Nirmar Bangesh highlighted this in The Mechanics.

00:08:50: here is pretty brilliant at risk mitigation.

00:08:53: Walk us through how that changes the underwriting dynamic for the LP.

00:08:56: So, typically an LP evaluates a platform company based on pro-former projections in a CIM but with a midlife coinvestment?

00:09:03: The dynamic completely flips.

00:09:06: let's say a GP has held a company for four years okay...the Company has a massive add-on acquisition opportunity.

00:09:11: But the original fund has exhausted its reserves.

00:09:14: so instead of forcing a premature sale In a depressed M&A market the gp brings and co investors to inject minority equity directly into the holdco.

00:09:23: From the LP's perspective, they aren't underwriting a projection anymore.

00:09:27: They are underwriting four years of actual audited financial performance under that specific sponsor

00:09:32: Right.

00:09:32: it fundamentally de-risks the asset.

00:09:34: The execution risk is already in known quantity And honestly this why we're also seeing allocators pivot so heavily into capital solutions.

00:09:43: Preston Richard brought us up Oh yeah Allocators care less about rigid fund structures and much more about deployment capability across the capital stack.

00:09:51: If a manager can structure senior credit, preferred equity or minority growth capital flexibly based on what the underlying asset actually needs LPs will fund them all day long.

00:10:02: Which transitions us perfectly to the other side of the liquidity problem.

00:10:06: because if LPs are changing how they deploy capital GPs Are desperately trying to figure out how to exit their current assets To generate that DPI we talked about earlier

00:10:16: exactly.

00:10:17: and since traditional strategic M&A and IPOs sort of frozen, they are turning heavily to continuation vehicles or CVs.

00:10:25: Yes the Rise Of The Forever Fund as Leila Kunamoto described it.

00:10:30: Wall Street advisors like Goldman and Evercore have built massive pipelines pitching evergreen CV's to sponsors right.

00:10:37: instead of liquidating a ten-year fund you transition the asset into a cv then maybe a c v squared effectively removing the exit horizon entirely.

00:10:48: It sounds like a GP is essentially the seller and the buyer at the same time.

00:10:52: I mean our CVs Basically, that private equity equivalent of a used car lot disguised as a premium dealership Like the GPs dress up these companies But are LPs just buying the GPS lemons?

00:11:05: That Is the exact friction point.

00:11:07: And Mustafa Siddiqui offered A very sharp analysis Of that conflict.

00:11:11: The reality is that roughly two-thirds of the company's being dumped into CVS are not the trophy assets, GPs claim they are.

00:11:21: Okay so they really are lemons?

00:11:23: Often yeah!

00:11:24: They're middling.

00:11:25: businesses that miss their growth targets cannot be sold conventionally in this raid environment or there just being carried at internal marks.

00:11:33: no third-party strategic buyer would ever pay.

00:11:36: So it's a mechanism to avoid downround and keep harvesting management fees

00:11:42: In many cases.

00:11:43: yes Siddiqui argues that because these assets are often flawed or marked too high, the secondary buyers stepping in to fund this CV is actually doing selling LPs a massive favor.

00:11:56: If you were an existing LP facing a rolled-or-sell decision on average CV his view was almost always take liquidity and run.

00:12:05: I see mechanical logic there but performance data tells completely different story.

00:12:11: Yeah,

00:12:12: Hugh MacArthur dug into the returns and you can't really argue with the actual outcomes.

00:12:17: Top quarter continuation vehicles have significantly outperformed top-quarter traditional buyout funds across every single vintage since twenty eighteen.

00:12:25: Wow!

00:12:26: If we look at the twenty eighteen to twenty twenty vintages, top quarter CVs are sitting at a two point six X return.

00:12:33: Traditional buyouts from that same era.

00:12:36: A

00:12:39: six hundred basis point spread in MOIC is, well it's impossible to ignore.

00:12:44: Right if these were all lemons the data wouldn't look like that.

00:12:48: MacArthur makes a structural argument of funds arbitrary ten-year clock and accompanies actual compounding trajectory rarely aligned perfectly.

00:12:57: sometimes a phenomenal business just needs longer duration capital structure to execute its thesis And forcing a sale into new sponsor destroys value.

00:13:05: It make total sense And that is why the consensus at the Merger Market Private Equity Forum in Austin, which Mustafa Azhar reported on was that CVs are a permanent structural evolution.

00:13:17: The vehicle itself isn't the problem—the executionist.

00:13:19: Executionism

00:13:20: is everything!

00:13:22: To solve the trust deficit you mentioned earlier about the GP being both buyer and seller…you have to run a pristine process.

00:13:29: You need a credible lead secondary buyer to anchor the price discovery, fully transparent fee economics and The GP has to roll significant personal capital into the new vehicle To actually align with the LPs.

00:13:41: Alignment

00:13:42: is everything especially now that financial engineering can't save a bad deal.

00:13:46: you just Can't rely on cheap leverage in multiple expansion anymore?

00:13:49: The only path left to hit That two point six X return as actual grinding operational improvement...the

00:13:55: operational moat!

00:13:57: Lima Cabe articulated this perfectly He said, the absolute most dangerous question an LP can ask a GP today is simply what exactly do you do after you buy

00:14:07: it?

00:14:07: Huh.

00:14:08: And they don't want to polish slide deck filled with buzzwords about synergistic digital transformation.

00:14:12: No!

00:14:13: They want the scars.

00:14:14: Exactly LPs are demanding GPs.

00:14:16: walk them through The last three operational improvements.

00:14:19: they personally drove on the factory floor.

00:14:21: What specifically broke Right?

00:14:23: Who resisted right?

00:14:25: How did you restructure this supply chain To change the unit economics?

00:14:29: If a GP sounds like they were grown in a fundraising laboratory and only knows how to optimize at capital structure, the allocators are passing.

00:14:36: But this creates a massive contradiction in the lower middle market right now.

00:14:40: How so?

00:14:40: Well as Capital concentrates on top with the mega funds there is a void at bottom.

00:14:46: Rachel Lindow-Stevens pointed out that independent sponsors have rushed into fill that void.

00:14:50: There're roughly fourteen hundred independent sponsor firms And taking down twenty five percent of all lower Middle Market deal volume

00:14:59: It is a profound shift in the buyer universe for sure.

00:15:02: But here's the problem.

00:15:04: based on her own data Almost none of these independent sponsors have an actual operating bench.

00:15:09: A huge percentage are former bankers who've never run a P&L In their lives.

00:15:14: Oh, yikes

00:15:15: Right.

00:15:16: If operational alpha Is only way to drive returns Isn't handing a quarter Of deal volume To sponsors without Operating experience a ticking time bomb?

00:15:25: it would be if The market wasn't aggressively filtering them out.

00:15:29: John Koppel's insight on this is crucial.

00:15:32: The M&A advisors and the capital providers backing these sponsors are acutely aware of that exact risk.

00:15:38: So they're screening for it?

00:15:40: Heavily, they are screening heavily for operational reality.

00:15:43: The independent sponsors who were actually winning the mandates in getting deals funded Are the ones who can walk into a target facility immediately identify the bottlenecks on the floor And present a granular hundred day execution plan.

00:15:56: The pure financial engineers in the independent sponsor space are just getting starved of capital.

00:16:01: Okay, that filtering makes sense.

00:16:03: But there is one tactical edge and the independent sponsored toolkit that Peter Martinson highlighted And it absolutely blew my mind.

00:16:11: It's a way to generate massive alpha without requiring a single ounce of operational heavy lifting.

00:16:18: Wait Alpha?

00:16:19: Without operational improvement.

00:16:22: Let's hear the mechanics.

00:16:23: It all comes down to the chronic underutilization of QSBS, Qualified Small Business Stock.

00:16:28: Specifically section twelve oh two of the tax code.

00:16:31: okay

00:16:32: think about how a standard independent sponsored deal is capitalized.

00:16:36: they usually raise equity on a deal-by-deal basis from taxable entities like family offices and high net worth individuals And almost by default.

00:16:45: The lawyer structured the acquisition vehicle as a pass through LLC

00:16:49: right meaning when the company's eventually sold Every dollar of gain flows directly to the investors and gets hit with maximum federal and state capital gains taxes.

00:16:57: Exactly, but if the sponsor simply structures the acquisition as a C Corp instead of an LLC And they hold the asset for five years They can utilize QSBS to exclude up to one hundred percent Of the Federal Capital Gains Tax on The Exit.

00:17:12: One Hundred Percent Yes!

00:17:14: That includes the investor's returns AND the sponsors own carried interest.

00:17:17: Wow The math on a zero percent federal tax rate on the full exit has to be staggering for the net MOIC.

00:17:24: Oh, it is!

00:17:25: Martinsson ran the exact numbers.

00:17:27: Imagine a standard lower-middle market buyout that yields a three point oh x gross multiple on invested capital at Exit?

00:17:34: If that deal was structured as conventional LLC after the IRS takes its cut of family office nets roughly two point four X.

00:17:41: okay.

00:17:42: if That exact same company with the exact same three point OX Gross Exit was structured as a QSBS eligible C-Corp, the family office takes home the full three point OX after tax.

00:17:53: To jump from two point four X net to a three point o nat in standard LLC structure A GP would have to fundamentally transform business and grind out at three point.

00:18:02: six to four point one X gross exit.

00:18:05: Exactly

00:18:06: That is an entire turn of MOIC generated exclusively at structuring table.

00:18:12: It requires zero margin expansion, zero add-on acquisitions and zero operational blood sweat and tears.

00:18:19: it just requires a GP who understands the sophisticated mechanics of the tax code better than the seller.

00:18:25: That is wild!

00:18:28: Brilliant example of the dual mandate required to survive in this environment.

00:18:31: You absolutely need the gritty operational scar tissue, too protect the downside and fix the underlying business.

00:18:38: but you also need elite structural sophistication To maximize every single dollar or the outcome for your LPs.

00:18:44: It really is a totally different game now.

00:18:46: I mean from The massive consolidation of capital at the top two the rise of direct LP co-investments the friction around continuation vehicles And structuring mechanics of section, the playbook has just been completely rewritten.

00:19:01: It has and I think the most important question for anyone listening to ask themselves is this as The market permanently bifurcates between mega funds managing evergreen capital And nimble operators grinding out operational alpha Where does your firm's true edge lie?

00:19:20: Are you relying on the momentum of a low rate Playbook that no longer exists Or are you actively building this specific scar tissue required to survive the next

00:19:45: decade?