Best of LinkedIn: Private Equity Insights CW 40/ 41

00:00:00: Provided by Thomas Allgaier and Frennus, based on those relevant Lincoln posts about private equity in CW-FORZERO-FOR-ONE, Frennus specializes in B to B market research for private equity teams to drive portfolio performance and value creation.

00:00:14: This edition is brought to you by our partner Informa.

00:00:17: Don't miss out on their upcoming conferences, Super Return Middle East, taking place between twenty-one, twenty-three October, and Super Return Europe, taking place between four to seven November twenty-twenty-five.

00:00:28: Final links to both conferences in the description.

00:00:32: Welcome back to the deep dive.

00:00:33: Today, we're cutting through the noise, synthesizing the top private equity trends we saw buzzing around LinkedIn over calendar weeks, forty and forty one.

00:00:41: Yeah, think of it as the highlights reel.

00:00:42: We're giving you the shortcut, basically, so you're instantly up to speed on where the smart money seems to be focused.

00:00:47: And if we had to boil down everything we saw, the big picture, it's this.

00:00:53: The industry is really undergoing a foundational shift.

00:00:56: Absolutely.

00:00:56: The old playbook, you know, relying heavily on financial leverage, writing that multiple expansion wave, it feels like that's being, well, retired.

00:01:03: That's exactly right.

00:01:03: The core conversation is just pivoted entirely.

00:01:06: It's less about engineering the balance sheet.

00:01:07: Much less.

00:01:08: And much more about engineering, you know, repeatable, scalable, intrinsic business value.

00:01:13: So our mission today is really to nail down where that new alpha is truly being generated.

00:01:18: And spoiler alert, it's all about operations.

00:01:21: Let's maybe dive into that first major theme, this fundamental shift towards operational excellence as the new standard playbook.

00:01:29: Right, we've heard talk about this for years obviously, but the data now seems to confirm the transition is well pretty much complete.

00:01:37: Kevin McAllister's analysis, for instance, showed that revenue growth is now accounting for roughly fifty-four percent of value creation in PE deals.

00:01:46: Fifty-four percent

00:01:47: which makes it the single largest driver.

00:01:48: Yeah, and that's a staggering figure isn't it?

00:01:50: because it really proves Sean McGrath's point.

00:01:53: the game has definitely shifted from you know making money on favorable entry and exit multiple

00:01:59: financial engineering bit

00:02:00: exactly yeah to making money on margin expansion and genuine organic growth and that requires a different kind of rigor, a completely different level of diligence.

00:02:12: It also means firms are proactively looking at, let's say, controllable risk.

00:02:16: Kristoff Jills made a good point that while most PE funds instinctively try to avoid operational risk.

00:02:22: Sure,

00:02:22: it makes sense.

00:02:22: The funds that actually succeed in addressing and, you know, solving those core business problems, they're the ones generating those outside superior returns.

00:02:30: So leaning into the operational challenges is the edge.

00:02:33: If you can fix the weak spots, that's your actual edge, yeah.

00:02:36: And this focus leads directly to very specific, prioritized operational levers.

00:02:42: Like when you're looking for that immediate, reliable uplift, Truman Fritz pointed out that pricing strategy really leads the value playbook.

00:02:49: Ah,

00:02:50: pricing.

00:02:50: Always a big one.

00:02:51: Consistently, the fastest, most reliable path to immediate EBITDA improvement, according to him.

00:02:57: Okay, so pricing is the immediate lever.

00:02:59: But what about those functions that maybe seem harder to directly monetize?

00:03:04: Like... customer support.

00:03:07: Yeah.

00:03:07: Philip Kraft made a really interesting, almost provocative argument there.

00:03:11: Yeah, he did, saying we shouldn't just view customer support as, you know, a necessary cost center.

00:03:16: Right.

00:03:17: He actually framed things like poor resolution times or outdated knowledge bases, not just as bad service, but as genuine EBITDA leaks.

00:03:26: EBITDA leaks.

00:03:27: I like that framing.

00:03:28: Leaks

00:03:28: that compound over time.

00:03:29: So fixing those leaks, actually transforming customer support into a value retention mechanism, that's pure operational excellence.

00:03:36: It ensures your customers stay profitable.

00:03:38: And if the main focus is on this kind of operational transformation, that obviously demands a very specialized workforce.

00:03:43: Paul Press.

00:03:45: outline the need for a specific sort of blended talent model to execute this new playbook effectively.

00:03:51: Right.

00:03:51: You could almost call it a blended pyramid model.

00:03:53: At the very top, you absolutely need those senior operating partners.

00:03:56: They bring the, you know, the experience, the board level influence.

00:03:59: They've set the overall strategic vision for creating value.

00:04:03: Okay.

00:04:03: Makes sense.

00:04:03: Yeah.

00:04:04: But those people are, let's be honest, expensive and pretty scarce.

00:04:08: Exactly.

00:04:09: So the leverage, the real grunt work comes from the base.

00:04:13: the mid-level operating professionals.

00:04:15: They're the analytical engine room, as press put it, providing the horsepower, the execution capacity you need to actually deliver that crucial one hundred day plan.

00:04:24: You really need both working together to generate repeatable alpha across a whole portfolio.

00:04:30: Which brings us quite neatly to our second big theme, the human factor.

00:04:34: Because in this operational era, the quality, the preparedness, the alignment of your talent, It's just non-negotiable.

00:04:41: Absolutely critical.

00:04:42: And we're seeing a definite change in what risk means during due diligence, particularly in those very human-centric sectors like professional services.

00:04:50: James Odab pointed out the funds are quite rightly getting wary of just templated reports.

00:04:55: We check the box stuff.

00:04:56: Yeah, because in these service industries, the biggest risks often aren't purely financial.

00:05:01: They're human.

00:05:02: We're talking culture clashes, employee sentiment, talent flight risk, that kind of thing.

00:05:07: which demands deep primary diligence focused on the people, not just staring at the spreadsheets.

00:05:13: And you know, this raises the bar significantly for anyone stepping into C-suite roles in PE-backed companies.

00:05:20: Definitely.

00:05:21: Maxwell Salazar, who comes at this from an IO psychology perspective, really stressed that preparedness now centers on genuine self-awareness and, importantly, accountability, moving past just listing generic strength.

00:05:35: Okay, but hold on.

00:05:36: Aren't self-awareness and accountability kind of management buzzwords we hear all the time?

00:05:40: What does Salazar actually mean in the context of, say, a PEC suite that has to deliver radical change in, like, a hundred days?

00:05:48: Fair question.

00:05:49: He means proven differentiated value.

00:05:51: You need to be able to clearly articulate the unique contribution you bring.

00:05:55: But crucially, you also have to be transparent about past failures and what you genuinely learned from them.

00:05:59: Ah, the failure part.

00:06:01: That's key.

00:06:02: It is.

00:06:02: He noted that if a candidate can't name a mistake or gets defensive about it, that lack of trust becomes a major liability when the board inevitably challenges them.

00:06:11: And when that trust is gone, well, Salazar says the writing is pretty much on the wall.

00:06:17: makes sense.

00:06:19: This demand for quick, high-impact operational change also seems to highlight the strategic use of interim leaders.

00:06:26: Jennifer Brooke-Bodfield run a poll showing, get this, sixty-three percent of respondents view operational efficiency as the top priority where these interims really excel.

00:06:35: Yeah, and Bjorn Henrichson echoed that point.

00:06:37: He noted that these leaders aren't just seat warmers until you find a permanent hire.

00:06:41: Not

00:06:42: just a stopgap?

00:06:43: No, they're seen as strategic catalysts for transformation.

00:06:46: They provide high impact leadership.

00:06:47: Essentially, leadership is a value creation tool, but without the delay you get with a long term executive search.

00:06:53: It's about immediate, dedicated expertise hitting the ground running.

00:06:57: And then finally, staying on the human side, there's the rarely discussed but potentially massive risk of succession.

00:07:04: Hassan Kaiser highlighted the leadership transition over at Seven Two.

00:07:08: It used to be APAC's partners, France, remember?

00:07:10: Ah, yes, between Eddie Misrahi and Thomas de Villeneuve.

00:07:14: Exactly.

00:07:15: And that stood out because it was such a rare example of really intentional, transparent succession planning.

00:07:22: Communicated years in advance to LPs, to stakeholders.

00:07:26: You're active, not reactive.

00:07:27: Precisely.

00:07:28: To ensure total continuity.

00:07:30: It was handled like a planned strategy, not like putting out a fire.

00:07:33: Okay, so let's maybe pivot now.

00:07:35: Let's turn our attention to the technological foundation underpinning this new operational era, theme three, the AI and technology revolution, which I think we can agree is clearly moving past the buzzword stage now.

00:07:47: Definitely feels that way.

00:07:48: It's becoming a core process driver.

00:07:50: Yeah, and Francois Candelon articulated the significance really well, calling AI a true industrial revolution.

00:07:56: He compared its potential impact to, like, electricity.

00:08:00: Wow, that's a big statement.

00:08:01: It

00:08:01: is.

00:08:02: But for PE, he stressed the focus isn't necessarily on chasing the next tech unicorn.

00:08:07: It's more about harnessing AI to drive operational excellence and, crucially, margin expansion within their existing portfolio companies.

00:08:15: And you can already see its impact in the diligence and deal cycle, right?

00:08:19: Donald Zambrano and several others emphasize AI's power to rapidly analyze these massive data sets.

00:08:26: Which just accelerates

00:08:28: everything.

00:08:28: Accelerates diligence, helps scale deal volume, lets firms move with, well, unprecedented speed sometimes.

00:08:35: Now, here's something interesting.

00:08:36: We often assume, don't we, that AI delivers its highest ROI at the largest scale, that bigger companies with more data benefit the most.

00:08:44: Yeah, that seems logical.

00:08:45: But Elizabeth C detailed the exact opposite happening in the mid-market.

00:08:49: She highlighted PE-backed packaging companies, maybe around the hundred and fifty million revenue mark.

00:08:54: Okay.

00:08:54: Seeing higher ROI like nine X plus from AI deployment than much larger firms.

00:08:59: Really?

00:09:00: Why is that?

00:09:00: The

00:09:00: reason they avoid the complexity tax.

00:09:02: The complexity tax.

00:09:03: Yes.

00:09:03: Explain that.

00:09:04: It's basically the organizational drag, the friction caused by years and years of fragmented, siloed, legacy IT systems that larger, older corporations inevitably build up.

00:09:16: Ah, the organizational scar tissue.

00:09:18: Exactly.

00:09:19: The mid-market often doesn't have that deep-seated complexity, so they can deploy targeted AI solutions much more efficiently, much

00:09:26: faster.

00:09:27: And get immediate results.

00:09:28: Like margin expansion.

00:09:30: Aaron Karthik Ganesan provided some really tangible examples using a simple three lens framework user, process, and customer.

00:09:38: You mentioned an industrial components maker cutting three full days off their month-end clothes just by using AI for invoice auto-matching.

00:09:45: Yeah, it's instant operational efficiency right there.

00:09:47: Yeah,

00:09:48: three days.

00:09:48: That's significant, however.

00:09:50: There's always a however, isn't there?

00:09:52: Lee McCabe raised a really critical counterpoint about the risk this whole trend introduces to the traditional PE model itself.

00:09:58: Yeah, so.

00:09:59: He argued that AI is effectively coming for the moat, the moat being judgment and pattern recognition, which historically that was the elite currency of top PE partners, right?

00:10:08: Their ability to spot things others miss.

00:10:10: Hmm.

00:10:11: Interesting point.

00:10:12: So if AI can spot pricing anomalies or structural inefficiencies faster than a human expert.

00:10:20: What is the human edge then?

00:10:22: That's the million-dollar question, isn't it?

00:10:24: If the machine handles the heavy lifting of pattern recognition, where should human insight focus?

00:10:29: Right.

00:10:29: Well, according to McCabe, the answer lies in context, creativity, and that cross-functional fluency, basically, the ability to ask better questions than the machine can even generate.

00:10:39: So it's about augmenting, not replacing.

00:10:41: Precisely.

00:10:42: And Steve Budd confirmed this too.

00:10:44: He noted that expert networks remain absolutely essential alongside AI because they provide that crucial real-world human judgment, the nuance, that models still can't replicate.

00:10:54: Okay, that makes a lot of sense.

00:10:55: Let's pivot now to the broader picture.

00:10:57: The macroeconomic environment markets signals.

00:11:01: Our fourth theme.

00:11:03: Are we still seeing significant challenges, particularly around liquidity and getting deals deployed?

00:11:07: Oh, absolutely.

00:11:08: Especially when it comes to distributions back to LPs.

00:11:11: Jan Voss shared some pretty sobering findings.

00:11:13: PE investors are apparently seeing record lows in distributions right now.

00:11:17: Really?

00:11:18: Record lows?

00:11:19: Yeah.

00:11:20: We saw reports mentioning one family officer saying they're struggling just to maintain their position or even cover their capital calls.

00:11:28: And the reasons cited were, you know, partly those high entry valuations from the twenty nineteen twenty twenty one bubble period.

00:11:35: Still feeling that hangover.

00:11:36: And of

00:11:36: course, the elevated interest rates on private credit.

00:11:38: So yeah, exit constraints are definitely

00:11:41: tight.

00:11:41: But OK, despite that tightness on the exit side, capital still needs to be deployed, right?

00:11:46: There's dry powder.

00:11:47: Hugh MacArthur highlighted a critical shift here.

00:11:50: Public markets are increasingly becoming the new private club, effectively supplying inventory for the next buyout vintage.

00:11:58: So more public to private deals.

00:12:00: Seems like it.

00:12:01: Investment activity tied to public companies has climbed to just over half of total PE activity now.

00:12:06: And that includes some absolutely massive headline grabbing.

00:12:10: take privates too.

00:12:11: Nicola Ebbmeyer pointed to the staggering example of electronic arts.

00:12:15: The EA deal, yeah.

00:12:16: Huge.

00:12:17: Structured with something like twenty billion dollars in debt and thirty six billion dollars in equity.

00:12:21: A fifty five billion dollar total deal value.

00:12:24: That LBO just demonstrates the continued massive capacity of PE to deploy huge amounts of capital in the public sphere through these complex take privates, pipees, carveouts.

00:12:37: It's a really dynamic interplay going on.

00:12:39: Hadrian Borelli's noted that even younger public companies are increasingly adopting practices we traditionally saw only in private firms.

00:12:46: Like what?

00:12:47: Like embracing tighter governance structures, more demanding management incentives, adopting those focused fundraising strategies common in PE.

00:12:54: The lines between public and private governance are genuinely blurring.

00:12:58: Interesting.

00:12:59: And finally, just quickly, as firms navigate this liquidity crunch and need to place their bets strategically, did we see any consensus on specific sector bets drawing attention?

00:13:08: We did, yeah.

00:13:09: Bruce Richards framed defense investment as mission critical.

00:13:14: Benefiting from compelling long-term fundamentals, steady cash flow, makes it attractive in a volatile market, you see.

00:13:20: Stable and essential, makes sense.

00:13:21: And then we also saw Jamie Smith and Brett Martucci highlighting energy utilities.

00:13:26: apparently being bought up pretty rapidly.

00:13:28: Utilities, why?

00:13:29: Driven primarily by the rising power demand from AI.

00:13:32: Ah, the AI connection again.

00:13:34: And the associated need for massive data center buildouts.

00:13:37: Yeah.

00:13:37: It really shows how technology infrastructure and traditional sectors are now fundamentally linked in PE strategy.

00:13:43: Fascinating

00:13:44: stuff.

00:13:44: If you enjoyed this deep dive, new additions drop every two weeks.

00:13:48: Also check out our other additions on Vitru Capital, M&A, and Strategy and Consulting.

00:13:53: So all right wrapping up this particular deep dive the main takeaway feels pretty undeniable doesn't it?

00:13:58: private equity is fundamentally changing its identity.

00:14:01: Yeah, it feels like it

00:14:02: moving from being perhaps just a provider of capital to becoming more of a core business architect.

00:14:09: The focus is no longer if you use operational transformation or AI

00:14:13: that ship has sailed

00:14:14: right.

00:14:15: It's how you staff and lead the human teams around those systems to deliver genuine repeatable value.

00:14:21: And I think the real challenge now for every firm is to look inward and seriously address that critical question Lee McCabe raised.

00:14:29: If AI is rapidly commoditizing traditional pattern recognition and judgment.

00:14:33: The old age.

00:14:34: The old age, exactly.

00:14:35: Okay.

00:14:35: How is your firm ensuring its value?

00:14:38: creators, its people are focused on those truly differentiated human skills, you know, the context, the creativity, the cultural alignment, things the machines simply cannot replicate.

00:14:49: That feels like the new scarcity.

00:14:51: That is the new edge.

00:14:52: Well, thank you for joining us for this deep dive.

00:14:54: Don't forget to subscribe or follow for the next one.