Best of LinkedIn: Private Equity: Fundraising CW 43/ 44

00:00:00: provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about private equity fundraising insights in calendar weeks forty-three and forty four.

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00:00:19: so our mission for this deep dive today is basically just cutting through all the noise out there, you know?

00:00:23: Synthesizing the top private equity insights and trends circulating across LinkedIn right now.

00:00:28: Yeah exactly I mean we really want to dig into these macro reality of this current market for you because uh well money is absolutely moving right now but it's only moving to very specific places

00:00:39: Right?

00:00:40: It feels like um if you look at the aggregate data We're dealing with a severe barbell economy in the fundraising market.

00:00:47: Oh For sure Like on one extreme all this capital just aggressively crowding into these proven mega giants, but then you know the middle is getting completely squeezed.

00:00:57: It's wild

00:00:58: it really is and I mean The sheer concentration of capital is staggering when you actually look at the raw pace Of things.

00:01:04: yeah Yeah because globally the market Is crawling through its slowest fundraising period since like At least two thousand twenty.

00:01:10: oh wow.

00:01:10: so through September we only saw Two hundred and twenty-two billion dollars raised which You Know might sound Like a massive number

00:01:17: Right.

00:01:17: I mean, yeah out of context it sounds huge!

00:01:19: Exactly.

00:01:20: but then you realize that by this exact same point last year the industry had pulled in three hundred and thirty billion dollars.

00:01:26: Wow

00:01:27: okay so that is a really steep drop-off.

00:01:29: Yeah It's massive drop in aggregate velocity.

00:01:32: But at the time if your sitting inside like KKR or Francisco partners You wouldn't even know there was a drought

00:01:38: going on right because they're On heavy side.

00:01:40: to that barbell

00:01:41: exactly i mean kkr just closed a twenty three billion dollar fund And Francisco partners pulled in sixteen billion dollars and EQT matched that with another sixteen million dollars.

00:01:50: So LPs aren't, you know fleeing private equity entirely?

00:01:54: No not at all.

00:01:55: they're fleeing perceived risk

00:01:57: right

00:01:57: there seeking shelter-in-scale basically operating under this assumption that a mega fund has the balance sheet to weather a five year storm.

00:02:06: That flight to scale is exactly what triggers that mid market squeeze we were talking about.

00:02:10: yeah The reckoning.

00:02:11: Tom Goldblatt actually made a really stark observation about this recently.

00:02:15: Oh, about the midsize firms?

00:02:16: Yes specifically managers in the sub-fifteen billion dollar category because these are firms that just don't have like massive credit arms or real estate divisions to cross subsidize their operations when the buyout carry dries up

00:02:29: right.

00:02:30: they don't know that safety net

00:02:31: exactly.

00:02:32: and he pointed to one specific two billion dollar manager That essentially imploded recently.

00:02:37: They lost roughly a dozen key professionals which actually included two of the three original founders.

00:02:43: That is brutal, and uh... The mechanism driving that talent bleed was super fascinating to me.

00:02:48: Yeah?

00:02:49: How so?

00:02:50: Well because it almost always traces back to those twenty-eighteen and twenty nineteen vintages.

00:02:56: like Those portfolios were built in a zero interest rate environment.

00:03:00: right

00:03:01: Oh Right!

00:03:01: The cheap debt era.

00:03:03: Exactly So.

00:03:04: now, they're getting squeezed by these elevated debt servicing costs and that just compresses the equity value across-the-board.

00:03:12: All while exits are totally delayed.

00:03:14: So the team looks at their invested carry and realizes it might be a mirage?

00:03:18: Exactly!

00:03:20: They jump ship to a larger platform which actually has fresh deployable capital.

00:03:24: Yeah I mean when the carry vanishes... The alignment vanishes

00:03:26: A hundred percent.

00:03:27: And look if its that brutal for established mid market teams.

00:03:31: The environment for emerging managers is practically hostile

00:03:34: right now.

00:03:34: Oh, I can only imagine

00:03:36: yeah Paul press shared some data.

00:03:37: looking at first-time fund formations and I mean the floor It's completely fallen out.

00:03:42: in the first half of this year Only twenty three first time funds successfully closed.

00:03:46: wait Twenty

00:03:47: three globally

00:03:48: in an industry this size

00:03:50: Inan industry this side?

00:03:51: Yes

00:03:52: Just twenty three for context from twenty, twenty one to twenty.

00:03:55: Twenty-three the historical average was a hundred and eighty One new funds year.

00:03:59: that is insane.

00:04:00: it Is now the capital ratio right?

00:04:02: Now shows experienced managers pulling in roughly seven dollars For every one dollar.

00:04:08: an emerging manager manages to scrape together.

00:04:10: well But he notes That The Real Insight Isn't just That Ratio.

00:04:14: It's This Operational Paradox That New Teams Are Trapped In.

00:04:18: What do you

00:04:18: mean by paradox?

00:04:19: Well Over half of all LPs now rank affirms value creation strategy as a top five criteria for investing.

00:04:27: So, LPs are demanding that new GPs prove they have these heavy hitting transformative operating capabilities before the even write-a check.

00:04:36: Oh I see which is basically The Ultimate Catch-Twenty Two

00:04:39: Exactly

00:04:40: Like.

00:04:40: you need to track record an elite Operating Team To raise money but You Need management fees from the raised Money

00:04:49: Right.

00:04:49: You can't just pay a former Fortune five hundred CEO in purely hypothetical future carry to sit around for two years while you fundraise?

00:04:56: Yeah, that doesn't work now but there are always outliers that defy the macro trend.

00:05:01: Alan Butler highlighted one That totally blew my mind.

00:05:04: Oh monomoy capital partners

00:05:06: Yes In the middle of this exact environment we're calling The slowest since twenty-twenty.

00:05:11: Monomoi went out and closed a five hundred and eighty nine million dollar fund in exactly

00:05:16: Two weeks is wild

00:05:18: Completely oversubscribed too, but the question is why?

00:05:22: Well when you look at the mechanics of how they did it It really reveals the blueprint for what LPs actually want right now.

00:05:28: It wasn't just about their historical returns Right!

00:05:30: It was an eighty-nine million dollar GP commit from The Firm and its affiliates.

00:05:34: that is deep Deep trust.

00:05:36: Okay But I have to push back on That.

00:05:37: a little bit

00:05:38: Can go forth...I

00:05:39: mean i have To challenge the narrative around A massive gp commit being this ultimate silver bullet.

00:05:44: Is An eighty nine Million Dollar check actually proof of raw conviction?

00:05:48: or in a market where you're fighting tooth and nail for LP capital, is it just the cost of doing business?

00:05:54: Like marketing expense that's just structured as equity.

00:05:57: That

00:05:57: is totally fair.

00:05:58: And honestly if your an LP sitting at that pitch meeting You are asking yourself that exact same question

00:06:04: Right?

00:06:05: Eric Chi brought up really brilliant framework on how institutional investors are underwriting these commitments.

00:06:12: The headline dollar amount Virtually meaningless without personal context.

00:06:17: What kind of context?

00:06:18: Well, take a classic five hundred thousand dollar GP commit on A small twenty-five million dollar fund.

00:06:24: that's standard.

00:06:25: two percent

00:06:26: sure That checks the textbook alignment box for microfund.

00:06:29: but The LP doesn't care about the two percent.

00:06:32: they want to know what share Of the GPs personal net worth that represents.

00:06:36: oh and it makes total sense.

00:06:37: right if the GP is a first time founder betting a third of their entire life savings, that five hundred thousand dollars means they're going to lose sleep if the portfolio company misses this single comment.

00:06:48: Yeah

00:06:48: absolutely.

00:06:49: But If That Same GP Just Step Down After Selling A Tech Company For Forty Million Dollars?

00:06:55: That Half-Million Dollar Check Is A Rounding Error.

00:06:57: It's The Exact Same Dollar Amount but One Signals Life Or Death Alignment and The Other is just a Toffey!

00:07:03: That Distinction Is Crucial.

00:07:05: LPs Aren't Measuring The Commitment Against The Fund.

00:07:08: They Are Measurng The Commits Against You

00:07:10: Exactly.

00:07:11: It's a percentage of you

00:07:12: and the mechanics of how that commitment is actually funded changes The math entirely to like.

00:07:17: if a GP uses a management fee waiver where they essentially forfeit future fee income and convert it into a Pseudo equity stake LPs will aggressively discount them.

00:07:28: Oh, one hundred percent

00:07:29: right

00:07:30: because from the LP perspective They're the ones paying the management fee in the first place.

00:07:33: Right

00:07:34: so The GP is basically using the LP's own money to fake their skin in game, without writing a net new cash check.

00:07:43: Exactly and To understand that psychology behind this Kelvin Fu recently pointed some really rigorous research out of UNC that analyzed over fifteen hundred funds.

00:07:52: Oh I think i saw this.

00:07:54: Yeah data show fund performance actually peaks when the gp commitment lands between ten percent and thirteen percent of total fun size.

00:08:01: Ten to thirteen percent That is a massive amount of personal capital to lock up.

00:08:07: Wait, what is the behavioral mechanism driving that specific peak?

00:08:11: It comes down to the psychology of risk.

00:08:13: if a GP only holds one percent or two percent of the fund The pain of a single deal going bankrupt Is mostly reputational right.

00:08:21: their personal wealth is totally insulated by those management fees.

00:08:24: So they might take reckless swings

00:08:26: exactly.

00:08:27: but as that personal commitment climbs toward ten or twelve percent Every dollar lost hurts them personally.

00:08:33: They become hyper-focused on downside protection and operational rigor,

00:08:38: but I mean if they go too high say like a twenty five percent or thirty percent GP commit?

00:08:43: I imagine the psychology flips completely.

00:08:45: Yep That's exactly what happens.

00:08:47: Like that becomes so terrified of losing their own massive nest egg.

00:08:50: But they stop playing to win and start playing not to lose.

00:08:52: they veto any aggressive M&A because he just can't stomach the risk

00:08:56: spot on.

00:08:57: So, ten to thirteen percent is that perfect behavioral sweet spot.

00:09:02: Enough skin-to-care deeply but not so much you paralyze the portfolio.

00:09:06: That makes a lot of sense.

00:09:07: And that balance risk and capability ties directly into a concept Mustafa Siddiqui emphasized recently affirms right to win

00:09:15: The Right To Win.

00:09:16: Yeah

00:09:17: LPs are actively looking past the track records from twenty ten to twenty-twenty one.

00:09:22: That entire decade had such strong macro tailwinds and multiple expansion that it basically disguised beta as alpha,

00:09:30: right?

00:09:30: Everyone looked like a genius in twenty nineteen exactly.

00:09:33: so now LPs want to know mechanically why a GP will win.

00:09:38: today We saw this validated in pitchbook data.

00:09:41: Looking at fun sizes Smaller funds, like in the one to five billion dollar range have been posting twenty-one point.

00:09:47: One percent IRRs

00:09:48: which is incredibly solid

00:09:49: it Is.

00:09:50: but The moment those exact same firms scale their next fund over five billion dollars?

00:09:55: The IRR drops off a cliff To thirteen point.

00:09:58: nine percent Wow.

00:10:00: and that's just because the mechanics of deploying capital change completely at that scale.

00:10:04: Exactly

00:10:05: firms outgrowing there capabilities is a huge risk for LPs.

00:10:09: Yeah, you can't just buy a scrappy founder-owned business for fifty million and triple its size anymore.

00:10:14: To deploy a six billion dollar fund You're forced to write five hundred million equity checks into these highly efficient deeply Intermediated large cap auctions where all the obvious value has already been priced in

00:10:25: Exactly!

00:10:26: Your fundamental right to win Just doesn't scale with your AUM

00:10:30: Absolutely.

00:10:31: And hey before we move on how this connects to current liquidity crunch Make sure take quick second hit subscribe so don't miss future deep dives.

00:10:38: Definitely because filtering through all this noise is what we do.

00:10:42: So if we connect the dots here, If LPs are scrutinizing personal net worth rejecting fee waivers and demanding extreme operational proof it's not just Because they woke up feeling cynical today.

00:10:54: No definitely Not.

00:10:55: It's a direct symptom of The fact that They Are completely starved for cash.

00:10:59: That scrutiny Is the byproduct Of A brutal liquidity desert.

00:11:02: so my question is private equity was always sold as an illiquid ten-year lockup.

00:11:08: Why are LPs suddenly acting like?

00:11:09: illiquidity is a bug rather than a feature?

00:11:12: That's the defining question of asset class right now.

00:11:15: And Vishnu Ambul shared some data from Hollyport Capital that totally explains this, The timeline has entirely warped!

00:11:22: How so?

00:11:23: Today only twelve percent of PE funds actually fully liquidate within ten years.

00:11:27: Just

00:11:27: twelve percent

00:11:28: Yes.

00:11:29: Oh my god

00:11:29: If you're a state pension fund that relies on predictable distributions to actually pay out retiree benefits this month, A ten-year funds stretching to twelve or fourteen years is catastrophic for your cash flow modeling.

00:11:41: It breaks the entire allocation model

00:11:43: and The median time of a fund to liquidate Is now stretching well past fourteen years.

00:11:48: That's wild

00:11:49: But the friction isn't distributed evenly across market.

00:11:53: Nego Zifang pointed data showing This exit crisis is predominantly large cap problem.

00:11:59: Okay, why large cap specifically?

00:12:02: Well for large-cap deals the median whole time has ballooned to seven point three years and That's because you have to look at when those large cap assets were purchased.

00:12:10: if a mega fund bought a software platform At the peak of the twenty twenty one market for a multiple of say sixteen point eight X EBITDA They

00:12:18: mathematically cannot sell it today

00:12:20: exactly in a high rate environment.

00:12:22: The entry multiple was so high that if they try to exit now.

00:12:26: They wipe out all their equity.

00:12:28: So they're essentially forced to sit on the asset for seven or eight years desperately trying to grow the underlying EBITDA just To like grow into that original bloated valuation.

00:12:38: Yep

00:12:39: in those twenty-twenty one large capteals Leverage alone accounted for roughly thirty one percent of the modeled value creation.

00:12:46: When the cost of that leverage doubled, The math completely broke.

00:12:50: But the small cap market is different.

00:12:52: Yeah, if you look at a small cap and lower mid-market data it's completely different story.

00:12:56: they're exiting much faster At a median of four point eight years.

00:13:00: Okay because the value down there has been created through fundamental operational growth.

00:13:04: right not just leverage

00:13:05: exactly

00:13:06: plus

00:13:06: Small cat managers have a structural advantage when they want to exit.

00:13:11: They just sell the company upstream do a Mid Market fund that is desperate to deploy its dry powder.

00:13:16: So liquidity still exists.

00:13:17: It's just heavily concentrated down market where operational alpha is actually possible, right?

00:13:23: But for the LPs trapped in those fourteen year large cap holding patterns they're basically having to engineer their own exits.

00:13:29: I mean Jordan Barnett noted that Singapore sovereign wealth fund GIC Is actively selling off a one billion dollar package of its private equity stakes.

00:13:37: Yeah The secondaries market is exploding.

00:13:39: But historically if an LP sold on the secondaries market, everyone assumed they were in deep financial distress.

00:13:45: Right?

00:13:45: Like it was a fire sale?

00:13:47: Oh

00:13:47: totally but now It's just proactive duration matching.

00:13:51: LPs are utilizing The Secondary Market strategically to manufacture the distributions They need To fund.

00:13:57: capital calls for their new commitments.

00:13:59: Its purposeful Now

00:14:00: Yes!

00:14:01: While LPs Are finding Their own liquidity GPs are engineering A completely different and honestly highly controversial solution Continuation vehicles or CVs.

00:14:12: Oh man, this is where the structural friction really heats up.

00:14:15: Yeah it really does

00:14:17: because a GP takes an asset they couldn't sell from an old fund and essentially sells It to themselves in a brand-new vehicle just to buy more time.

00:14:25: Ted Said he's actually shared a quote From a prominent LP who flat out called them conflict vehicles

00:14:30: Which is a pretty accurate name.

00:14:32: honestly you can see why?

00:14:33: It's like being forced to refinance your house using a mortgage broker who also happens to be the appraiser and the buyer.

00:14:40: The conflict of interest is completely structural.

00:14:42: Yeah, the GP gets a brand new vehicle locks in fresh ten years management fees resets their carry baseline And the original LP has just left wondering if the asset was actually marked at fair price.

00:14:54: Exactly!

00:14:56: Every hour a GP spends raising and managing a CV Is an hour they aren't spending creating value on the primary commingled fund

00:15:03: True, but Namisha Srivastava did offer a very pragmatic defense of the mechanism recently.

00:15:08: Really?

00:15:09: Defending CVs!

00:15:10: Yeah she argued that CV's aren't inherently toxic provided the LP does the heavy diligence on the underlying motive.

00:15:18: I hear that defense But let's be real here.

00:15:21: if a GP couldn't find a way to exit a company in seven years Why on earth should an LP trust them to hold it for another five?

00:15:29: Doesn't the whole stellar asset argument just sound like a highly convenient excuse to keep the management fee clock ticking?

00:15:36: It definitely can be, which is exactly why her litmus test is so effective.

00:15:40: You look at the GP and ask if the IPO window was wide open right now and strategic M&A was booming would you still be putting this asset in a continuation vehicle?

00:15:51: Oh that's a great question Right?

00:15:53: If The Answer Is No it's A Bailout Genuinely compounding it twenty five percent organically and you just need more runway to finish an acquisition roll-up.

00:16:04: Then, that's a valid wealth creation strategy.

00:16:06: Okay?

00:16:06: That makes sense.

00:16:08: So if we pull all these threads together If holding periods are stretching past fourteen years And LPs are fiercely auditing your operational capabilities because financial engineering is dead GPs Are basically being forced to find new source of structural operational alpha.

00:16:25: Yep Almost unanimously, the industry is turning to AI to find it.

00:16:29: They are but I have to challenge the AI hype here.

00:16:33: Are GPs actually using AI to transform portfolios or Is this just you know where everyone buys?

00:16:38: The exact same software put on a slide deck.

00:16:41: Well Niko Ludwig actually coined a term for exactly what your describing AI Samification

00:16:46: AI samification.

00:16:48: Yeah, I love

00:16:49: that you have hundreds of funds buying the exact same off-the-shelf generative tools And it is making PE brands founders and investment memos sound entirely indistinguishable.

00:17:01: right because when everyone Outsources their narrative to the same algorithm You lose the idiosyncratic judgment That actually generates alpha in private markets

00:17:10: exactly.

00:17:11: but Harry Davies recently shared some intel from a private breakfast with heavy weights like CVC, Temasek and HG.

00:17:19: Oh what did they say?

00:17:20: They admitted that AI is creating massive efficiencies in due diligence like scraping data rooms automating legal reviews.

00:17:27: but it's creating a bizarre tragedy of the commons in origination

00:17:31: because if every mid-market fund deploys an AI agent to scrape the exact same databases to find the exact Same founder owned manufacturing businesses The outreach volume goes parabolic.

00:17:41: Exactly founders are getting flooded with automated emails that all sound identical.

00:17:46: So the technology creates efficiency for the fund, but it completely destroys the conversion rate

00:17:52: right?

00:17:53: The consensus among those top funds is that AI itself offers zero long term competitive advantage.

00:18:00: everyone will have the models.

00:18:03: true competitive advantage only come from pairing AI with proprietary non public data and deep human expertise.

00:18:10: But the vast majority of firms don't have that data infrastructure to actually pull it off, right?

00:18:15: Not at all.

00:18:16: Ivanland has shared surveyed data showing this massive disconnect.

00:18:20: Ninety-nine percent of PE firms claim they are piloting or scaling agentic AI autonomous agents that execute tasks.

00:18:28: Okay.

00:18:29: Yet only nine per cent of them are confident They could pass a basic AI governance audit.

00:18:33: Only

00:18:34: nine percent.

00:18:35: Yeah.

00:18:36: Why the huge gap?

00:18:37: Because how their data is structured.

00:18:39: You cannot train a deterministic AI agent on unstructured chaos.

00:18:44: The survey noted, seventy percent of PE firms still run their operations on manual spreadsheets and decentralized folders.

00:18:51: Oh wow!

00:18:52: Spreadsheets?

00:18:53: Yeah That's the nightmare for AI.

00:18:55: If A Language Model pulls a critical revenue projection from cell C-fourteen in an unlabeled outdated Excel file from twenty nineteen how do you audit that decision path?

00:19:06: No, you definitely can't.

00:19:08: That's why governance fails.

00:19:09: but there are firms trying to bypass the infrastructure problem entirely by redefining the operating partner model.

00:19:16: Like who?

00:19:17: Well Michael Kaufman highlighted a group called Alderaan that just closed an eight hundred and eighty five million dollar fund for what they call transformation equity.

00:19:26: They're acting like traditional Operating Partners Who Just Fly In For A Board Meeting And Advise The Portfolio Company To Maybe Experiment With Chat GPT.

00:19:35: So What Are You Doing Differently.

00:19:36: They are embedding full proprietary AI engineering teams directly into the portfolio companies.

00:19:42: Oh, wow!

00:19:43: Yeah they're ripping out that traditional legacy operations of say a thirty-year old manufacturing business and rewriting the company's core operations on an AI code base specifically to permanently steal market share from slower competitors.

00:19:57: That is aggressive

00:19:58: But it completely bypasses the talent bottleneck.

00:20:02: Trying to find a portfolio CEO who possesses deep traditional industry acumen, but can also architect an enterprise-wide AI deployment is nearly impossible.

00:20:11: Exactly.

00:20:11: Embedding the engineering team solves that completely.

00:20:14: It really points toward where the industry's heading.

00:20:16: The easy beta of the twenty tens has just gone...the structural mechanics and private equity How alignment is measured?

00:20:24: how liquidity is manufactured And how value was forcibly created are being entirely rewritten.

00:20:31: Which leaves us with a fascinating final thought for you to too on.

00:20:35: if we project this AI arms race out to twenty thirty and We assume every single fund has embedded engineering teams the exact same autonomous origination And perfectly optimized algorithmic diligence Doesn't technology advantage simply cancel its help-out?

00:20:49: That's a great point

00:20:50: right like when technological efficiency reaches a plateau Maybe the ultimate alpha just reverts back to one thing a model can never replicate.

00:20:59: Deep, old-fashioned human relationships proprietary networks and raw entrepreneurial grit?

00:21:04: It's The Ultimate Paradox of next decade!

00:21:17: If you enjoyed this episode, new episodes drop every two weeks.

00:21:20: Also check out our other editions on PE Value Creation, PE Exit Strategies Venture Capital M&A and Strategy & Consulting.

00:21:28: Thanks for joining us for This Deep Dive.

00:21:30: Don't forget to hit subscribe And we will catch ya next time.