Best of LinkedIn: Private Equity Insights CW 42/ 43

00:00:00: provided by Thomas Hall Geyer and Frennus, based on the most relevant LinkedIn posts about private equity in CW-Forty-two and Forty-three.

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

00:00:15: This edition is brought to you by our partner Informa and Private Equity Insights.

00:00:19: Don't miss out on their upcoming conferences, Super Return Europe, Private Equity Insights Nordics, and Private Equity Insights United Kingdom.

00:00:27: Find the links to all three conferences in the description.

00:00:41: That's

00:00:54: coming through loud and clear in the sources we looked at.

00:00:57: Exactly.

00:00:58: Yeah, there's a clear narrative emerging, the old game, relying purely on multiple arbitrage, you know, buy low, sell high, just because the market went up.

00:01:07: That's fading fast.

00:01:09: As Jacqueline put it, value creation itself isn't.

00:01:12: new, obviously, but the way you achieve it, that's changing completely.

00:01:16: The focus now is squarely on generating operational alpha.

00:01:21: Okay, let's unpack that core shift first.

00:01:23: It seems like the general feeling, and Paul Stoop summed this up really well after a value creation conference he intended, was basically financial engineering is dead.

00:01:32: That sounds pretty provocative.

00:01:34: What does it actually mean day to day for a PE firm, say, in the mid-market?

00:01:38: Well, it means the whole logic behind the deal has kind of flipped.

00:01:40: That classic roll-up strategy, just buying smaller companies, sticking them together for scale, it doesn't just work on autopilot anymore.

00:01:47: Alexander Kalis really emphasized this.

00:01:49: Operational excellence isn't some kind of nice-to-have bonus now.

00:01:53: It's mandatory.

00:01:54: It's basically the only reliable lever left.

00:01:57: And I suppose the numbers back that up.

00:01:59: It sounds dramatic.

00:02:00: Oh, absolutely.

00:02:00: The data does.

00:02:02: Historically, you know, multiple expansion might have given you, what, maybe thirty-two percent of your value creation?

00:02:07: Something like that.

00:02:08: But look at the recent figures.

00:02:09: The UK mid-market actually saw entry and exit multiples compress.

00:02:14: They went down from about nine point two times EBITDA to seven point six times.

00:02:18: Wow.

00:02:19: Yeah.

00:02:19: So if you want a return, you have to earn it.

00:02:22: purely through earnings growth.

00:02:24: That spreadsheet arbitrage, it's just not there like it was.

00:02:27: That makes complete sense.

00:02:29: But okay, having a brilliant operational strategy is one thing.

00:02:32: Rolling it out, actually executing it across maybe twenty portfolio companies.

00:02:35: That's usually where things, you know, hit the wall, which I guess brings us to what Paul Stoop called the execution trap.

00:02:42: What's the biggest reason things go wrong?

00:02:44: The statistic he shared is, well, it's pretty shocking and apparently quite consistent.

00:02:48: Eighty percent, eighty percent of value creation plans, VCPs fail.

00:02:52: And crucially, they don't fail because the strategy itself was bad.

00:02:56: They fail because of a fundamental lack of execution discipline, systemically.

00:03:00: Right.

00:03:00: Eighty percent.

00:03:01: That failure rate is just huge.

00:03:04: So if eighty percent fail, what are the top twenty percent doing differently?

00:03:08: This is really where the rubber meets the road, isn't it?

00:03:10: Right.

00:03:10: And Stoop highlighted three things.

00:03:12: Three sort of non-negotiable fixes.

00:03:14: First one is governance.

00:03:16: It sounds simple, but it's key.

00:03:18: You have to assign clear ownership, like one specific name against each initiative, not a committee where responsibility gets diffused.

00:03:26: And you have to tie that ownership directly to incentives.

00:03:30: That

00:03:30: small shift from committee to individual accountability, that must change the whole dynamic inside a portco, right?

00:03:37: Is that the biggest single difference?

00:03:38: I think it's the critical starting point.

00:03:40: You know the saying, when everyone is responsible, no one is that.

00:03:43: The second fix flows right from that.

00:03:45: Every single initiative, no matter how small it seems, has to be translated into a quantified financial impact.

00:03:51: What's the actual EBITDA uplift?

00:03:53: What's the cash flow improvement?

00:03:54: Without that clear business case, figuring out priorities is just, well, it's guesswork.

00:03:58: Which directly tackles that problem of trying to do too much too soon.

00:04:01: You just can't chase forty things at once and expect good execution.

00:04:05: Exactly.

00:04:06: And that leads to the third fix.

00:04:07: Ruthless filtering, the successful funds, they focus only on the top, say, five to seven value drivers.

00:04:15: They use something like a benefit versus effort matrix to prioritize, and then they just have to ignore everything else.

00:04:20: Sounds tough, but it's necessary.

00:04:22: Focus.

00:04:23: Ruthless focus.

00:04:24: And that urgency is critical.

00:04:26: Jack Cyrate, a great point about the UK market specifically.

00:04:29: He said, inaction right now is the most expensive decision you could possibly make.

00:04:33: Relentless focus, clear accountability.

00:04:35: Got it.

00:04:36: That's the new mantra.

00:04:37: Okay, speaking of execution and efficiency, let's pivot to technology.

00:04:41: Specifically, the one promising massive operational alpha.

00:04:45: AI.

00:04:46: Because here it gets really interesting.

00:04:48: The narrative seems totally split, doesn't it, between like futuristic hype and just hard ROI reality.

00:04:54: Yeah, the tension is really palpable.

00:04:56: Aaron G had a good post on this.

00:04:57: He noted that too many investors fall into this trap of overspending millions, sometimes on these custom bespoke AI solutions, you know, the kind of massive projects you might bring in Palantir or McKinsey for.

00:05:09: But they do that while ignoring the fact that most of the measurable high ROI value right now is coming from much simpler, high-impact tools.

00:05:17: It's like they're prioritizing a differentiated AI strategy over just simple effective execution.

00:05:23: So, okay, if we strip away that bespoke hype.

00:05:26: What are the measurable, practical gains people are seeing right now?

00:05:30: Where is simple execution actually winning with AI?

00:05:33: Well, we're seeing clear, measurable wins in probably three main areas.

00:05:36: First, the simplest, maybe highest ROI step is just rolling out a single, secure LLM provider like ChatGPT or Claude, company-wide, just for general productivity boost.

00:05:46: Second is customer service optimization.

00:05:49: That's an area where the metrics like cost per resolution are really clear and you can see the impact quickly.

00:05:54: And third, there was a really stunning PE-specific example.

00:05:57: Eric Halverson's team, Irina Lysenko, shared this.

00:06:00: They managed to automate ninety percent of a massive, seventy-five hundred page, quarterly reporting workload using AI tools.

00:06:07: Well,

00:06:07: ninety percent of seven thousand five hundred pages.

00:06:09: Yes.

00:06:10: That's genuinely transformative automation.

00:06:12: It really is.

00:06:12: Real tangible leverage.

00:06:14: However, there's always a however, isn't there?

00:06:18: Nicholas Bird shared a really crucial reality check.

00:06:21: I think every PE firm needs to hear this one.

00:06:24: It was a hypothetical but very telling story about an AI rollout in an accounting firm they acquired.

00:06:31: What was the core problem there?

00:06:32: The core struggle was translating that slick demo performance into the well the messy real world data, as he put it.

00:06:40: The AI worked perfectly in the lab, the test environment, but when they applied it to actual live client data with all the human errors, the complexities, like miscoding construction clients, things like that, it just struggled.

00:06:52: But the real failure wasn't just the tech, it was human.

00:06:54: Ah, right.

00:06:55: The people side, the trust barrier.

00:06:57: Precisely.

00:06:58: Staff training took like... Forty hours instead of the eight they budgeted.

00:07:02: actual adoption of the tool is only thirty five percent when they projected eighty percent and Fundamentally the accountants just didn't trust the output especially for complex client stuff.

00:07:11: They ended up spending more time double-checking the AI than they were saving.

00:07:14: Hmm.

00:07:15: So the lesson isn't really that AI doesn't work.

00:07:17: It's more that the data foundation underneath it and maybe the psychological barrier to adoption that matters even more than the algorithm itself.

00:07:25: Absolutely,

00:07:26: that's spot-on.

00:07:27: Andrea Belissage highlighted how the whole industry conversation has shifted.

00:07:30: It's moved away from just focusing on algorithms and models to focusing on things like power, literally the megawatts needed and crucially governance.

00:07:41: To make AI truly actionable, you need that reliable data infrastructure first.

00:07:45: And Karsten W. emphasize the role of knowledge graphs here.

00:07:50: Okay, knowledge graph.

00:07:50: That's a term you hear thrown around a bit now in board meetings.

00:07:53: Sir, for our listener, can you quickly define what that means in practice?

00:07:56: Is it just a fancy dashboard?

00:07:58: No, it's more fundamental.

00:07:59: It's really about changing how data is accessed, especially when it's stuck in different silos.

00:08:03: CRM over here, ERP over there, HR data somewhere else.

00:08:07: A knowledge graph connects all those disparate sources into a kind of unified, context-aware network.

00:08:13: It's like an intelligent layer over your data.

00:08:16: It doesn't just store the data points.

00:08:18: It maps the relationships between them.

00:08:20: That's what makes the AI results traceable, trustworthy.

00:08:24: and ultimately actionable across the whole business, the whole portfolio.

00:08:28: It basically turns siloed data into usable infrastructure.

00:08:31: Data infrastructure is the new operational mode.

00:08:33: Makes sense.

00:08:34: Okay, so we've established that even the best strategy and the best tech, they both fall apart without that relentless execution.

00:08:41: And execution ultimately comes down to leadership.

00:08:43: So how are PE firms thinking differently about the profile of the executives they back in this new reality?

00:08:48: While Hannah Robb was really emphatic on this point, she argued that talent is basically the single biggest value creation frontier over the next five years.

00:08:56: Period.

00:08:57: The example she shared about a professional services firm's growth was telling.

00:09:01: it was powered by leadership, not leverage.

00:09:04: The focus on human capital.

00:09:06: It's never been higher simply because the operational demands now are so intense.

00:09:10: Yeah,

00:09:11: Ted Billies, citing Alex Partners, described the current environment for CEOs as, for pressure cooker.

00:09:18: It definitely sounds like a high stakes, rapid pace world requiring a different kind of leader.

00:09:23: And

00:09:23: that intensity demands a complete role transformation, particularly from the CFO.

00:09:28: Oscar Perello argued the CFO mindset has to shift from being the traditional steward, you know, managing risk, reporting the P&L to being a builder.

00:09:36: Someone focused on driving rapid focused transformation.

00:09:39: I definitely see the role changing, but shifting from a risk managing steward to a transformation builder.

00:09:44: I mean, those sound like fundamentally different personality types almost.

00:09:48: How are funds finding people who can actually balance that, that pace of change with the necessary financial discipline?

00:09:53: That really is the core challenge.

00:09:55: Scott Engler noted that PECFOs are now expected to do it all.

00:09:59: drive the pace, align the culture with the investment thesis, and constantly be able to, as he put it, see around corners.

00:10:07: It demands a highly adaptive, really forward-looking profile.

00:10:10: And this ties into why Maxwell-Salazar cautioned against

00:10:13: P.E.'s

00:10:14: historical obsession with just the seasoned executive.

00:10:18: Sometimes that deep experience can actually be a liability if it translates into your rigidity.

00:10:23: If your investment thesis really depends on deep transformation, you might need to optimize for adaptability over just traditional, perhaps more rigid experience.

00:10:32: That's a really vital internal calibration point for any PE partner, isn't it?

00:10:36: And if we look at the talent pool itself, William Ahmed Khan pointed out what seems like a glaring inefficiency, the untapped advantage of female operating partners.

00:10:45: Yeah, the numbers are pretty stark.

00:10:47: Women currently hold only about twenty-five percent of operating roles in private equity.

00:10:51: And when you think about the complexity of the value creation demands today, that disparity means you're potentially leaving performance on the table.

00:10:59: It really does seem that way.

00:11:00: And the financial case for actually addressing that gap seems overwhelming.

00:11:03: Totally.

00:11:05: There are studies showing that funds with gender balance senior teams generate significantly higher returns, something like ten to twenty percent higher.

00:11:12: And beyond the numbers, female OPs often bring enhanced risk assessment skills and crucially superior collaborative leadership abilities.

00:11:20: Those are exactly the skills you need to drive consensus and get things done across diverse stakeholder groups in a portfolio company during a transformation.

00:11:30: It's really a pure performance issue.

00:11:32: OK, let's shift gears slightly now.

00:11:34: at the broader market dynamics, maybe some regional hot spots.

00:11:37: Starting with exits, we know the overall pace of asset sales has been, well, slow.

00:11:42: Yeah, definitely slow overall, though Tom Rivas did report that Blackstone actually had a pretty strong quarter, realizing something like nine point three billion dollars.

00:11:50: So there are signs of life.

00:11:52: Okay, some green shoots perhaps.

00:11:53: Maybe.

00:11:54: But overall, liquidity is still tight, and that's forcing funds to get creative, which is why secondaries are being reframed.

00:12:00: They used to be seen as just an episodic solution, you know, maybe a mechanism for struggling LPs to get out.

00:12:06: Now they're becoming a much more strategic portfolio management tool.

00:12:10: Right.

00:12:10: And continuation vehicles, or CVs, seem to be gaining a lot of traction in this tight environment.

00:12:16: Luca Barbie and Neha Carraria both highlighted their strategic value.

00:12:20: Just quickly, for the listener, what exactly is a continuation and why is it so strategic right

00:12:25: now?

00:12:26: Okay, so a continuation vehicle, basically, it allows the GP, the fund manager, to roll a really proven, high-performing asset from an older fund into a new fund structure that they also manage.

00:12:37: The beauty of it, the strategy, is to align everyone's interests.

00:12:40: The LPs and the old fund who need or want liquidity, they get it.

00:12:43: New secondary investors.

00:12:45: They get exposure to a proven asset under proven management.

00:12:48: And, maybe most importantly, the portfolio company itself benefits from continuity.

00:12:53: The value creation plan can continue without the disruption of a forced sale in potentially a bad market.

00:12:59: It keeps things stable.

00:13:00: That makes a lot of sense, ensuring continuity when the market maybe isn't willing to pay the price you want.

00:13:06: Okay, let's do a quick geographical spotlight starting with Germany.

00:13:09: It seems like there might be an arbitrage opportunity there.

00:13:12: Yeah.

00:13:12: Christoph Joost highlighted a really interesting structural opportunity in Germany.

00:13:15: PE investment there is incredibly low relative to the economy, only about .

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00:13:39: Definitely noticing they're acquiring German small caps, particularly intact at really significant premiums.

00:13:45: He cited the example of Warburg Pincus offering an eighty-four percent premium for PSI software.

00:13:50: When you see premiums like that, it strongly suggests the public markets are maybe undervaluing these companies, creating a clear arbitrage for sophisticated PE buyers.

00:13:57: Eighty-four percent premium.

00:13:59: Wow.

00:14:00: Okay, shifting readings again over to the Gulf.

00:14:02: The recent super return Middle East conference generated some key insights into what's still a rapidly maturing but quite unique region.

00:14:12: What's the main takeaway for deploying capital in Mininay?

00:14:15: I think Sebastian Lehman summed it up well.

00:14:18: You need to understand that the Middle East is fundamentally a growth market.

00:14:21: It's not typically a traditional leveraged buyout market like the U.S.

00:14:25: or Europe.

00:14:26: So success there requires patience, building trust, and often having a real long-term presence on the ground.

00:14:33: The dynamics are very much driven by family offices.

00:14:35: They really form the backbone of the regional capital.

00:14:38: And what are those family offices prioritized?

00:14:40: Is it different from, say, a typical institutional LP?

00:14:43: Very different in some ways.

00:14:45: Trust and alignment are paramount.

00:14:47: A wise patneen and Khalid Shammi both emphasize this.

00:14:49: They look really closely at a manager's behavior, especially under pressure, and how well they align with the family's long-term vision.

00:14:56: That stuff often matters far more than just a flashy pitch deck or hitting the highest target multiple.

00:15:01: You're fundamentally building a relationship, not just closing a transaction.

00:15:04: Interesting.

00:15:05: Relationship over transaction.

00:15:07: And related to that regional growth story, private credit seems to be emerging strongly there too.

00:15:13: Exactly.

00:15:14: NTS Hussein noted that private credit is really finding its feet, bridging that gap between traditional equity and senior bank debt.

00:15:21: And a lot of that dynamic is driven simply by a widening void being left by traditional banks in the region, which creates opportunities for more flexible, often really necessary capital solutions for growing companies.

00:15:34: Okay.

00:15:34: And just wrapping up the market view, PE seems to be exploring some new, maybe less traditional investment areas, highly fragmented sectors.

00:15:43: Yeah.

00:15:43: A couple of interesting ones popped up.

00:15:45: Alan Ritchie detailed growing interest in the business of law.

00:15:48: The idea is to aggregate typically small fragmented law firms.

00:15:52: It's a sector with generally low capital intensity and potentially high margins into larger centralized

00:15:58: platform firms.

00:15:59: Consolidating the legal sector.

00:16:01: And another niche may be slightly unexpected.

00:16:04: Scott Spalding highlighted the underserved mid-market sports club sector, particularly in Europe and Latin America.

00:16:10: We're talking about clubs where relatively modest capital injections, sometimes just one million to twenty million dollars, can professionalize operations, tap into that passionate fan base and be quite transformative, kind of professionalizing the passion economy.

00:16:24: Fascinating.

00:16:25: Okay.

00:16:25: And just circling back one last time to the core value creation levers, we can't forget ESG or sustainability.

00:16:32: Is that still just a nice to have or is it driving real value?

00:16:36: The consensus now seems clear.

00:16:38: It's a proven value driver.

00:16:40: Antonio's Kaia Abdo and Sydney Straver both reinforce this.

00:16:44: Sustainability initiatives when implemented with discipline are demonstrably driving financial performance.

00:16:48: They're seeing measurable EBITDA uplifts, maybe in the range of four to seven percent, coming purely from operational improvements linked to ESG.

00:16:56: So yes, it's a quantifiable value creation lever now, not just compliance.

00:17:00: So that was quite a tour through the key trends shaping PE right now.

00:17:04: If we boil it all down, what's the absolute core insight?

00:17:07: I think it's that value creation today is determined much less by the spreadsheet, by financial maneuvering, and much more by, well, relentless execution, by having adaptive, trustworthy leadership and simply getting the right people in the right seats.

00:17:22: Absolutely.

00:17:23: The era of easy wins through financial engineering definitely feels like it's over or at least significantly paused.

00:17:29: The pressure is squarely on execution.

00:17:31: Yeah.

00:17:31: And I think the real question for you, the listener, for the next six months or so, it isn't really about deal picking up or where market multiples are going to land, it's more fundamental.

00:17:40: It's asking, does your operational plan, your VCP, have genuine clarity?

00:17:45: Does it have real accountability?

00:17:47: Do you have the data infrastructure needed to support it?

00:17:50: Or are you potentially stuck in that eighty percent failure rate category, just kind of hoping the market bails you out before your plans for people and technology maybe fall short?

00:17:59: That feels like the real test now.

00:18:00: That is indeed the ultimate test of conviction.

00:18:02: If you enjoyed this deep dive, new additions drop every two weeks.

00:18:07: Also, be sure to check out our other additions covering Venture Capital, M&A, and Strategy and Consulting.

00:18:12: Thank you for diving in with us today, and be sure to subscribe so you don't miss our next analysis.