Best of LinkedIn: Private Equity Insights CW 38/ 39

00:00:00: Provided by Thomas Allaguer and Frenis based on most relevant LinkedIn posts about private equity in CW three eight thirty nine.

00:00:07: Frenis specializes in BDB market research for private equity teams to drive portfolio performance and value creation.

00:00:14: Welcome to the deep dive today.

00:00:16: We're cutting straight into the essential intelligence for you know M&A and investment professionals.

00:00:21: Our mission is to synthesize the top private equity insights and actionable trends.

00:00:26: The stuff that's been bubbling up across LinkedIn, we're focusing on calendar weeks, thirty eight and thirty nine.

00:00:31: And honestly, the sources we pulled together tell a very specific story about today's market.

00:00:34: Yeah, they really do.

00:00:35: And that story, if you distill all the chatter and data, it's one of acute pragmatism.

00:00:41: The days of relying on cheap money and multiple expansion, they seem clearly over.

00:00:46: The market now is really being shaped by these immense liquidity constraints.

00:00:49: And that's forcing this dramatic pivot back

00:00:52: to fundamentals.

00:00:52: Back to basics.

00:00:53: Exactly.

00:00:54: Deals, portfolio management.

00:00:57: It's no longer about just financial engineering.

00:00:59: It's fundamentally about prioritizing hands-on operational value creation and demanding real excellence at every executive level.

00:01:08: That brings us perfectly to our first major theme then, the execution engine.

00:01:12: The market is just screaming that execution matters infinitely more than, well, slideware.

00:01:16: It feels like a painful admission.

00:01:18: But Paul Stoop highlighted this kind of startling paradox.

00:01:22: Despite GPs spending big money on strategy consulting, more than half of all value creation plans, VCPs, never actually move beyond that initial polished presentation.

00:01:32: They

00:01:32: just die on the slide deck.

00:01:33: Exactly.

00:01:34: It's the strategy to execution gap just personified.

00:01:37: And if you're a GP today, you simply can't afford that kind of failure rate anymore.

00:01:40: Stoops suggests the key is translating that grand vision into granular action.

00:01:46: Okay, so how does that work in practice?

00:01:48: It means breaking the overall strategy down into short-defined, ninety-day sprints, each one with clear ownership, specific metrics, you know, real accountability.

00:01:57: But wait, focusing just on ninety-day sprints, doesn't that risk turning high-level strategy into just tactical busy work?

00:02:05: How do you make sure you don't lose sight of the really complex long-term stuff?

00:02:10: That's the balancing act, and it's absolutely critical.

00:02:12: You have to consciously balance those quick wins, which You know, you need them to build momentum and get cultural buy-in, balance those with the harder multi-quarter must-win battles.

00:02:23: Like what?

00:02:24: Things like completely re-engineering the supply chain or tackling complex integrated pricing strategies.

00:02:30: Stuff that takes maybe a year to fully implement.

00:02:33: And the most powerful accelerator here, it should be obvious, but often isn't, is alignment.

00:02:38: Meaning value creation must be directly linked to management incentives and bonuses.

00:02:43: If the team isn't actually paid for VCPs, success?

00:02:45: Well, it probably won't happen.

00:02:47: Simple as that.

00:02:48: That focus on operational discipline.

00:02:50: Yeah.

00:02:50: It also address cost efficiency, right?

00:02:52: But maybe not just the blunt instrument approach.

00:02:55: Exactly.

00:02:55: Needs your S pointed this out.

00:02:57: Looking at IT vendor rationalization, for instance, it's presented as a strategic liver.

00:03:03: So not just simple cost cutting.

00:03:05: It's really about strategically unlocking agility and resilience by streamlining what's often a fragmented kind of bloated IT ecosystem.

00:03:14: Makes sense.

00:03:14: And the shift in operational expectation.

00:03:17: Well, it changes who you need in the C-suite.

00:03:20: Matthew R. Budd described the modern PECFO archetype.

00:03:24: They're not just historical scorekeepers or, you know, numbers people anymore.

00:03:28: Right.

00:03:28: They have to be strategic operators.

00:03:30: Forward thinking, adaptable.

00:03:32: someone who genuinely thinks like an investor to drive portfolio value, not just managed at the general ledger, it's a different mindset.

00:03:38: And the talent factor generally seems to be maybe the highest risk area, especially when you look at CEO turnover figures.

00:03:45: Maxwell Salazar dropped what he called an extremely hot take, arguing that PE boards need a CEO interrogator, not a CEO whisperer.

00:03:53: That sounds intense.

00:03:54: It does sound intense, but you can see exactly why he's advocating for that level of rigor.

00:03:59: The sources are showing nearly sixty percent of PE back CEOs are replaced within two

00:04:02: years.

00:04:03: Sixty percent.

00:04:04: Yeah, that failure rate is just catastrophically expensive.

00:04:07: Think about the time, the value erosion, the disruption.

00:04:10: So the interrogator's goal isn't really to be mean.

00:04:14: It's to conduct these Candid high fidelity assessments that actually mirror the real pressure of the boardroom and surface those key execution risks before the company loses millions.

00:04:26: I mean, if they can't handle direct difficult questioning during the assessment phase, they certainly won't handle the pressure after two misquarters, right?

00:04:34: It's a necessary stress test, maybe brutal, but necessary.

00:04:38: That shift from polite assessments to... brutal stress tests really underscores the current market mood, doesn't it?

00:04:44: Okay,

00:04:45: speaking of tools to drive execution, let's look at what platforms are being used.

00:04:49: That brings us neatly to AI and the strategic technology playbook.

00:04:53: Here, the conversation seems to have fundamentally shifted.

00:04:55: It's moved from viewing AI purely as a back office cost factor to seeing it as a critical revenue driver.

00:05:01: That's a point Matt Young strongly advocated.

00:05:03: Absolutely.

00:05:04: And the capital is definitely following that thesis.

00:05:06: We saw metal, for instance.

00:05:08: They raised five million dollars, led by base ten partners, specifically to build an AI operating system tailored for private equity.

00:05:16: an AI operating system for PE, what does that actually mean?

00:05:19: Well,

00:05:19: think of it as taking all that fragmented data, you know, CRM logs, scattered files, diligence reports, and turning it into a single cohesive living intelligence system.

00:05:30: It's designed to basically amplify human judgment during deal flow and then later in portfolio management.

00:05:36: Okay, that sounds incredible on paper, but the reality on the ground, especially maybe for smaller or middle market portfolio companies.

00:05:44: That's often tougher.

00:05:45: It

00:05:45: can be

00:05:46: run.

00:05:46: Go to air.

00:05:46: noted a crucial reality check here AI only delivers a real payoff when the portfolio companies leadership in the organization itself are actually ready to absorb the technology.

00:05:55: Without that internal capacity for change.

00:05:57: It's just another expense line, right?

00:05:59: Doesn't really move the EBITDA needle?

00:06:01: Exactly right.

00:06:02: And you see this capacity challenge magnified during complex post merger integrations or PMIs.

00:06:09: Philip Kraft pointed out that the AI posture between merging units can differ dramatically.

00:06:13: How so?

00:06:14: Well, you might have one legacy unit banning the use of generative AI completely, maybe due to legal or security concerns, while the acquiring unit is leaning heavily into it for productivity gains.

00:06:26: That kind of internal misalignment, it severely impacts synergy relationships and just slows down delivery speed.

00:06:32: Yeah, it creates friction right where you're supposed to be finding synergy.

00:06:35: Yeah.

00:06:35: So to address that specific execution gap, are we seeing more specialized tools emerge?

00:06:40: We

00:06:41: are, like Data to Value or D to V, which Karsten W mentioned.

00:06:45: This is software designed explicitly for PE operating partners.

00:06:48: Its whole purpose is to connect data insights to actual EBITDA improvement.

00:06:53: So very focused.

00:06:54: Very execution oriented.

00:06:55: It's like package knowledge focusing on levers like AI driven forecasting, pricing options.

00:06:59: optimization, that kind of thing.

00:07:01: It really reflects the fact that, you know, generalist software probably isn't good enough anymore if you want to generate real alpha.

00:07:06: Right.

00:07:06: Needs to be tailored.

00:07:07: Which brings us to the root cause of all this operational intensity.

00:07:11: Theme three.

00:07:12: Liquidity constraints, exits, and fun dynamics.

00:07:17: If you look at the symposium insights reported by Thomas Linné, the core message is, well, tighter liquidity overall, and a significant compression of both entry and exit multiples.

00:07:28: We're seeing deals that previously might have priced around, say, twelve X EBITDA, now closing closer to eight.

00:07:34: Wow.

00:07:35: Twelve down to eight.

00:07:36: That's a tectonic shift.

00:07:37: That is.

00:07:38: It fundamentally resets the underwriting math for every deal.

00:07:41: professional listening into this, surely.

00:07:44: I mean, if you lose four turns of multiple on the exit, you just can't rely on market timing or financial engineering anymore.

00:07:50: Nope.

00:07:51: The only path left to generate the promised return is manufacturing operational value, dollar for dollar.

00:07:56: The risk profile of every single deal just goes up dramatically.

00:07:59: Absolutely.

00:08:00: The market is clearly constrained and capital is backing up.

00:08:03: Christopher Schelling laid out the scale of this problem using hard data.

00:08:07: The average age of PE-backed companies at exit, now over seven years.

00:08:12: Seven

00:08:12: years.

00:08:13: And get this.

00:08:14: We have an astounding three to four point five trillion dollars in unsold net asset value NAV locked up in portfolios.

00:08:23: Three to four point five trillion.

00:08:24: That's that's the capital bottleneck right there.

00:08:26: That's the

00:08:27: bottleneck.

00:08:27: That huge portfolio parking lot must be putting immense pressure on distributions to paid in capital DPI, which as you said that the metric LPs really care about now.

00:08:37: It is, and Shelling's analysis on DPI was fascinating because he kind of challenged some long-held assumptions.

00:08:43: Oh.

00:08:43: Yeah, he compared funds by size and sector, so small funds versus mega funds, IT sector versus others, and found that once you factor in the vintage year, there's actually no material difference in the realization pass or DPI.

00:08:56: Really?

00:08:57: So fun size or sector doesn't automatically mean better DPI?

00:09:00: Apparently not, once vintage is accounted for.

00:09:02: The core takeaway seems to be that liquidity and performance are highly idiosyncratic.

00:09:07: It doesn't really depend on how big or specialized the fund is.

00:09:10: It depends more on the specifics of the deal and, crucially, the operational skill of the GP.

00:09:15: Interesting.

00:09:15: Okay, so given that huge backlog and the desperate need for liquidity, GPs have had to get creative, right?

00:09:22: Which leads to the continued rise of continuation vehicles, CVs.

00:09:27: But Harold Berlenig highlighted a major issue here.

00:09:30: a governance headache.

00:09:31: Yeah,

00:09:32: it's a structural conflict, isn't it?

00:09:33: In a CV, the GP is essentially buying an asset from its old fund and selling it to its new fund.

00:09:39: Right.

00:09:40: Buyer and seller.

00:09:41: Same entity.

00:09:42: Exactly.

00:09:42: The buyer and the seller are sitting at the same table.

00:09:45: That creates this inherent fiduciary tension regarding valuation and pricing, and this lack of sort of objective governance is likely why.

00:09:55: Well, his sources suggest eighty percent and ninety percent of LPs who are offered the choice are opting for cash liquidity rather than rolling over their stakes into the new vehicle.

00:10:03: They just want their money back.

00:10:04: They want their money back, understandably.

00:10:06: And that hunger for cash liquidity must be making life extremely difficult for fundraising teams right now.

00:10:12: Oh, absolutely.

00:10:13: Nicola Ebbmeyer noted that mega fund sizes have plateaued or even declined compared to the previous cycle because those slower exits lead directly to allocation constraints for LPs.

00:10:24: They just don't have the capital coming back to reinvest.

00:10:26: Makes sense.

00:10:27: And Brent Martucci really hammered this home.

00:10:30: Fundraising is brutal for most GPs today.

00:10:33: They are being measured intensely on DPI.

00:10:36: Can you actually return capital rather than just the theoretical internal rate of return, the

00:10:41: IRR?

00:10:41: So show me the money.

00:10:42: Pretty much.

00:10:43: If you can't show the cash coming back to LPs, securing commitments for the next fund becomes nearly impossible in this environment.

00:10:50: Okay, let's pivot to our final theme, sector focus and M&A activity.

00:10:54: Which actually seems pretty resilient in areas where capability is the main driver.

00:10:58: Yeah, that's a good point.

00:10:59: James Ransom noted that private equity is really turbocharging consulting rollups.

00:11:03: We saw examples like Grant Thornton acquiring stacks.

00:11:06: The strategic rationale seems clear.

00:11:09: Build scaled platforms and acquire missing capabilities quickly.

00:11:12: Capabilities like AI integration or deep operational expertise.

00:11:16: Exactly.

00:11:17: Stuff you don't want to build slowly from scratch.

00:11:20: That consolidation playbook is proving extremely effective globally, it seems.

00:11:24: Look at the European health tech and med tech sectors.

00:11:28: Lloyd Price and Sina Esimiri detailed the M&A playbook there.

00:11:32: Apparently, that market is rapidly consolidating.

00:11:35: Deals over a hundred million dollars actually doubled year on year in

00:11:41: twenty twenty four.

00:11:43: Well, the central investment thesis in that region seems overwhelmingly AI.

00:11:48: It captured something like fifty-eight percent of digital health funding.

00:11:51: Okay.

00:11:52: Their analysis stressed that success there relies on a really rigorous buy and build strategy, you know, using a strong platform asset.

00:12:00: Right.

00:12:01: And what I found most insightful from their analysis, though, was how they view complex European regulations.

00:12:07: Things like MDR and GDPR.

00:12:09: Ah, yes, the regulatory angle.

00:12:11: They

00:12:11: don't see them just as hurdles.

00:12:12: they frame them as potential sources of competitive advantage, like a moat.

00:12:16: That's smart.

00:12:17: If your portfolio company masters these complex regulatory frameworks, you basically de-risk the asset and potentially lock out competitors who can't meet those high-compliance standards.

00:12:27: Yeah, turning bureaucracy into a competitive edge.

00:12:30: It's a fascinating way to frame regulatory overhead.

00:12:33: Definitely.

00:12:34: Okay.

00:12:34: And finally, maybe we should just briefly touch on a longer term structural shift that came up, the democratization of private markets in Europe.

00:12:41: Right.

00:12:42: Andre McKelley and Yannick Elhag brought this up talking about initiatives like LTIFF, and LTF in the UK.

00:12:49: What are those exactly?

00:12:50: Well,

00:12:50: essentially, they're regulatory changes and new fund structures designed to make private assets more accessible to smaller fractional investors.

00:12:58: And we're already seeing partnerships form like FinTech platforms.

00:13:01: Trade Republic was mentioned.

00:13:03: with major GPs like Apollo and EQT.

00:13:06: To

00:13:06: offer fractional access.

00:13:07: Exactly.

00:13:08: It marks a potentially fundamental structural rebalancing of where capital is sourced in the region over the long term.

00:13:15: Interesting times ahead there.

00:13:16: So, if we tie all these threads together.

00:13:19: We've tracked the intense pressure from liquidity and multiple compression, the forced pivot to superior operational execution, the needed for those executive stress tests, and the strategic use of AI and M&A to secure immediate capabilities.

00:13:35: If we connect all that back to Christopher Schelling's finding, that performance is highly idiosyncratic.

00:13:41: It really reinforces one singular proof for the modern GP, doesn't

00:13:44: it?

00:13:44: Which is?

00:13:45: Success hinges less on predicting market timing, maybe less than ever before, and much more on proprietary deal sourcing.

00:13:53: avoiding those expensive competitive auctions, and, crucially, superior hands-on operational execution.

00:14:00: That seems to be the only truly reliable source of alpha left in this market.

00:14:04: That really is the ultimate test for any firm right now, isn't it?

00:14:07: Can you truly execute on the ground?

00:14:09: If you enjoyed this episode, new episodes drop every two weeks.

00:14:12: Also, check out our other editions on venture capital, M&A, and strategy and consulting.

00:14:16: Thank you for diving deep with us today.

00:14:17: Make sure you subscribe so you don't miss our next deep dive.

00:14:19: We'll see you soon.