Best of LinkedIn: Private Equity: Exit Strategies CW 44/ 45

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00:00:19: And today we are taking a deep dive into top Private Equity Exit Strategies.

00:00:23: specifically what's trending across LinkedIn right now?

00:00:26: Yeah, and it is a really fascinating time to look at this because we are Examining an exit environment.

00:00:32: That's just its structurally shifting

00:00:35: right?

00:00:35: It's a market where all those traditional playbooks or basically breaking down

00:00:39: completely breaking down buyers today They aren't paying for you know ambitious roadmaps anymore.

00:00:45: they are demanding flawless execution.

00:00:48: Exactly And this creates us wild paradox in the current exit Market which is our first big theme Today.

00:00:55: on paper Exes actually look fantastic right now, but in reality there's this massive backlog.

00:01:02: Yeah Alex Edlich brought up a data point that just completely blew my mind.

00:01:06: he points out This massive sixteen thousand company problem.

00:01:10: oh

00:01:10: sixteen thousand sixteen

00:01:11: thousand That's how many portfolio companies globally have been held for more than four years Right Now

00:01:17: which is what like fifty two percent of the global buyout inventory

00:01:20: Exactly it Is The Highest We Have Ever Seen?

00:01:23: That Staggering.

00:01:24: I mean It's Like It's like a nightclub that boasts about record VIP spending, right?

00:01:29: The numbers look great.

00:01:30: But there is this sixteen thousand person line outside That just hasn't moved in four years.

00:01:34: That Is the perfect analogy

00:01:36: because you know only the absolute A grade assets are actually getting past the velvet rope.

00:01:40: Right and Philip Kraft Actually gave him name to This.

00:01:43: he calls it liquidity illusion.

00:01:45: Because yes global PE exit value reached nine hundred eighty five point two billion dollars In the first nine months of twenty twenty six.

00:01:53: almost a trillion dollars.

00:01:54: right huge number.

00:01:56: but the actual exit volume, the number of deals fell to just three thousand two hundred ninety five transactions which is the lowest since the first quarter of twenty-twenty one.

00:02:05: So massive dollar amounts?

00:02:07: But very few actual companies getting sold

00:02:10: exactly

00:02:12: and as a result we're seeing this holding period dilemma.

00:02:15: these traditional five year holds are stretching out to what six sometimes up to seven years yeah

00:02:21: And it's huge trap.

00:02:22: Dale Zagaiski shared some Russell Reynolds data on this.

00:02:25: that really shows why it's so dangerous.

00:02:27: So deals with no CEO change holds for about five point, five years on average.

00:02:32: Okay That makes sense.

00:02:33: but deals with two CEO changes.

00:02:35: those drag out to an average of eight point Five Years.

00:02:38: wait hold up eight

00:02:39: point five years.

00:02:40: Let me push back a little bit doesn't admit?

00:02:43: Holds CEO swap usually fix the struggling company when you bring someone in to put out the fires.

00:02:48: Well sure, I might put out the operational fires but Greg Head had a great insight on this.

00:02:53: He pointed out that mid-hold CEO changes rarely advance the actual exit

00:02:58: case.

00:03:00: So they fix their business and don't prep it for sale?

00:03:02: Right!

00:03:03: Eighteen months pass...the new CEO stabilizes everything.

00:03:06: The company is stable But you're literally no closer to an exit because all of that urgent triage work just took over the calendar.

00:03:13: That makes total sense.

00:03:14: You've spent two years on defense Essentially,

00:03:18: exactly and you can't sell a company when your just playing defense

00:03:21: right.

00:03:22: which brings us to our second theme.

00:03:24: Which is the fallout of all this waiting?

00:03:26: Because these stretched holds are creating severe cash crunch for the limited partners.

00:03:30: The LPs.

00:03:31: It's brutal if companies aren't selling LPs aren't getting paid.

00:03:35: So the entire industry is shifting its focus away from moik You know multiple on invested capital And moving entirely to DPI which is distributions to paid in capital

00:03:45: cash-in hand

00:03:46: Exactly.

00:03:47: Louie LaHote noted that twenty-twenty one buyout funds have returned only about fourteen cents on the dollar.

00:03:52: so far, DPI has just plummeted to six percent of total assets down from what normally?

00:04:00: The historical average is usually around sixteen percent and they are starving for cash And this is compounded by... Well Lee McCabe had a great observation about the denominator effect.

00:04:11: Oh yeah walk us through because math was wild.

00:04:14: So we've got Public market rally recently, right?

00:04:18: Mostly driven by AI hyperscalars and semiconductors.

00:04:20: Right the tech boom

00:04:21: exactly.

00:04:22: so The public side of LP portfolios has just surged in value.

00:04:26: But because LPs allocate their investments based on strict percentages If the public site gets huge they're total portfolio denominator Gets huge

00:04:35: which means there are PE allocation shrinks as a percentage yes.

00:04:38: So this public rally automatically compresses their capacity for private equity even with like one point three trillion dollars in dry powder just sitting around the industry.

00:04:48: The LPs are tapped out, the math is literally firing the GPs.

00:04:52: it's incredible yeah.

00:04:53: and before we get into how GPS or trying to desperately solve this margin crunch with AI which has a huge topic I should quickly mention if you're enjoying the steep dive take a second to subscribe so you don't miss our future discussions.

00:05:05: Yeah definitely hit subscribe.

00:05:08: So looking at solutions, the old playbook is dead.

00:05:12: Right?

00:05:13: Relying on cheap debt and multiple expansion which drove like fifty nine percent returns from twenty ten to twenty-twenty two.

00:05:19: that's

00:05:20: gone long gone.

00:05:21: so how do they bridge the gap?

00:05:23: Nicholas Metzkin pointed out That a credible AI story can skyrocket software ARR multiples From you know three to six X upto an incredible ten to fifteen X. I have asked it's AI The ultimate exit cheat code?

00:05:36: right now?

00:05:37: I mean, i want to push back hard on that.

00:05:39: Really?

00:05:39: Yeah because buyers don't pay for roadmaps anymore they pay for evidenced margin.

00:05:45: Lee Deacon emphasizes this heavily basic AI co-pilots are not going to move the multiple

00:05:50: They're just plugging in.

00:05:50: a chatbot won't do it

00:05:52: Exactly.

00:05:52: The real value comes from what he calls agentic AI

00:05:56: Agentic AI.

00:05:57: yeah systems that actually execute core processes end To End.

00:06:01: Not Just A Tool That Saves Someone An Hour On Friday But A System Doing The Work.

00:06:06: Lucas Beth will added to this saying the future multiple expansion is gonna come from AI native operating leverage.

00:06:13: What does that look like in practice?

00:06:15: Well, imagine a SaaS company.

00:06:16: That generates ten million an ARR with just forty people instead of the traditional one hundred people.

00:06:23: So you're fundamentally changing the unit economics or business.

00:06:26: right but that takes years To actually prove out.

00:06:28: and the financials You can't just slap an AI label on it and sell at tomorrow

00:06:33: which creates a massive problem.

00:06:35: Because if traditional M&A is jammed for B-grade assets and achieving those AI driven margins takes years, how do sponsors generate liquidity right now?

00:06:44: They have to create entirely new lanes.

00:06:47: There's no other choice

00:06:48: All right which brings us to theme three alternative liquidity.

00:06:53: Ashutosh Kumar Jha highlighted that secondaries hit a record one hundred twenty one billion dollars in just the first half of twenty twenty six.

00:07:00: Yeah That's not an each market anymore And GP-led continuation vehicles, or CVs now dominate the space.

00:07:08: They represent fifteen percent of all sponsor backed exit value right now.

00:07:12: That's huge!

00:07:13: It is like eighty three percent of the top one hundred buyout sponsors are using them.

00:07:18: Banks were even pitching evergreen vehicles that allow for ten to fifteen year holds.

00:07:23: but and here is the critical why it matters point less than five percent of LPs actually roll over into these CVS Waitless

00:07:31: then five percent?

00:07:32: Yeah

00:07:32: LPs want cash.

00:07:34: They do not want marks on a spreadsheet

00:07:37: Which brings up a great question for you listening right now.

00:07:40: What stands out to you when you look at your own portfolio?

00:07:43: Because to me rolling an asset into a continuation vehicle is like It's like refinancing your house to pay off your credit cards.

00:07:50: That's good way to look at it, right?

00:07:52: if buys you time sure but You still have to fix the leaky roof.

00:07:56: The business hasn't actually improved just because you moved it to a new fund.

00:08:00: I completely agree.

00:08:01: Weymar Helski calls this the value realization gap.

00:08:05: Let's say you buy a company at twelve X and use five turns of debt, And your aiming for ten x exit.

00:08:11: Okay pretty standard aggressive model

00:08:13: Right But to make that math work You need sixteen point.

00:08:16: five percent EBITDA growth annually

00:08:19: Every single year.

00:08:21: And that massive operational to-do list falls on the exact same six to eight operators who are just trying to run the business.

00:08:28: On a Monday morning,

00:08:29: That is just immense pressure.

00:08:30: it this and it creates what we've seen called Exit ability debt.

00:08:34: exactly It's all that accumulated Operational complexity The stuff that gets left behind because they're really hard improvements Just kept getting postponed so the team could fight daily fires.

00:08:44: right.

00:08:45: the IT integrations.

00:08:46: that never happened.

00:08:47: the manual processes.

00:08:50: Buyers are hunting for this now.

00:08:52: James McRae, who does a lot of diligence work notes that buyers expect you to have identified and quantified all your tax risks.

00:08:59: They don't expect a spotless record but they expect you know your own

00:09:02: mess.

00:09:03: No surprises

00:09:04: zero surprises.

00:09:05: Steven Segel actually shared a haunting story about us.

00:09:08: A life-changing exit completely died because the historic compliance gap was discovered during diligence.

00:09:14: But wait?

00:09:14: Was there gaps still active?

00:09:16: no That's the crazy part.

00:09:18: It was completely fixed.

00:09:19: The business was compliant, but the buyer walked away anyway.

00:09:23: because historic exposure doesn't just disappear.

00:09:26: If regulators look back three years...the liability is still there.

00:09:31: Oh wow.

00:09:32: So even if you fix the roof ...the water damage in walls can kill the sale.

00:09:36: Exactly You cant clean it up with a six month sprint before going to market anymore.

00:09:41: That's terrifying for management team that has been putting off hard integrations

00:09:47: And it leaves us with a final, I think really provocative thought to mull over which wasn't even the main focus of these posts but It's the logical conclusion.

00:09:55: I'd love to hear.

00:09:57: So if continuation vehicles are making ten to fifteen year holding periods at The new norm and If AI is drastically reducing operational headcount Over that same decade Are we going To see A massive surge in minority PE investments?

00:10:12: Oh like advance recent deal.

00:10:14: Yes, exactly.

00:10:15: Advent took a twenty-four point nine percent stake in Yacht Art hospitals.

00:10:20: In a world where exiting a controlling steak is this difficult and requires so much heavy lifting Maybe the safest bet Is letting the promoter keep control

00:10:29: So... The exit belongs to someone else.

00:10:31: Right Okay Yeah You just provide capital And let them handle the exitability debt.

00:10:37: That's fascinating shift in risk profile.

00:10:40: Definitely something.

00:10:41: watch closely as market evolves.

00:10:43: Absolutely

00:10:44: Well, if you enjoy this episode new episodes drop every two weeks.

00:10:48: Also check out our other editions on PE value creation private equity fundraising venture capital and M&A and strategy in consulting.

00:10:56: Thanks for listening.

00:10:57: And be sure to subscribe.