Best of LinkedIn: Private Equity Insights CW 44/ 45

00:00:00: Provided by Thomas Allgaier and Frennis, based on the most relevant LinkedIn post about private equity in CW-IV-IV-IV-IV.

00:00:08: Frennis 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, Private Equity Insights.

00:00:18: Don't miss out on their upcoming conferences, Private Equity Insights Nordics and Private Equity Insights United Kingdom.

00:00:23: Find the links to both conferences in the description.

00:00:27: Welcome.

00:00:28: So today we're really diving into the private equity intelligence.

00:00:31: we've picked up around the super turn Europe conference and those couple of weeks right after.

00:00:36: what seemed really clear I think is that the old PE playbook.

00:00:40: Well, it's pretty much archived now.

00:00:41: Exactly.

00:00:42: Yeah, we saw this really decisive shift almost aggressive moving away from pure financial engineering.

00:00:46: It's all heading towards, you know, deep operational execution.

00:00:50: So our mission today is basically to distill the top PE trends that surfaced on LinkedIn during that key period CW, forty four and forty five where folks focusing on the value creation tactics, the people making it happen, and these kind of new realities around liquidity and fundraising.

00:01:05: So if you're running a portfolio company, maybe managing a fund or even advising clients in this space, think of this as the condensed guide to where returns are actually being made right now.

00:01:15: Let's jump straight in.

00:01:16: The big one everyone's talking about.

00:01:17: Operational excellence as the new alpha engine.

00:01:20: Yeah, that's the core shift.

00:01:21: Absolutely.

00:01:24: Let's call them the easy years in PE.

00:01:26: They're definitively over.

00:01:27: Nicola Meyer put it quite plainly.

00:01:29: Generating returns today needs real value creation.

00:01:33: You can't just rely on cheap debt and multiple expansion anymore.

00:01:35: And there's some pretty stark data backing this up, right?

00:01:38: Hugh MacArthur from Bain & Company, looking at realized returns over the last fourteen years.

00:01:42: But about half came from revenue growth and multiple expansion.

00:01:45: Okay.

00:01:46: But the really shocking part, and I think this is what makes operational excellence just non-negotiable now, is that zero percent came from margin improvement.

00:01:53: Zero.

00:01:54: Zero percent from margins over fourteen years.

00:01:57: I mean, that's almost an indictment of the old operating models, isn't it?

00:02:00: Just shows how heavily GPs relied on, you know, external market factors that tied lifting all boats.

00:02:06: Now, it's the internal work that grinding hands on operational stuff.

00:02:11: That's the only path left for margin uplift.

00:02:13: which brings us to the team doing that work.

00:02:15: Wayne Morhelski had that great line, PE needs builders, not babysitters.

00:02:20: We're moving past just managing things reactively.

00:02:22: Yeah, demanding proactive construction of value.

00:02:25: And the timing of bringing those builders in is critical.

00:02:28: The beta is showing firms that embed operating partners during diligence, actually getting them involved in vetting the thesis, challenging assumptions before the deal structure is set before it's baked.

00:02:38: Well, they realize EBITDA improvements something like one point eight times faster.

00:02:42: That's a huge huge advantage purely from process design.

00:02:45: Right.

00:02:45: Just getting the timing right gives you leverage.

00:02:47: But this execution focus, it's got to be more than just, you know, basic cost cutting or headcount reduction.

00:02:52: Grig War, Tandro made the point that value creation starts much deeper right down at the product level.

00:02:58: Exactly.

00:02:59: This is where it gets technical.

00:03:01: With input costs rising and all this pressure on pricing, teams are really digging into methodologies like product cost out.

00:03:07: And this isn't just like switching a supplier.

00:03:10: It's deep designed to value.

00:03:12: component rationalization, stuff that can genuinely deliver up to, say, a twenty-five percent improvement in gross margin.

00:03:19: That's how you manufacture AlphaNow.

00:03:20: Okay, so you fix the product cost structure, then you've got to sell it effectively.

00:03:24: Zorian Rotenberg was highlighting GTM go-to-market as the full-stack commercial and revenue growth strategy.

00:03:31: That's what decides if a B to B portco flies or flops.

00:03:34: And the precision needed there, Alan Gonsenhauser really emphasized this.

00:03:38: Your ideal customer profile, your ICP, it has to be the rigorous operating translation of the investment thesis.

00:03:44: So if your thesis was built around say, serving Fortune five hundreds in the Midwest, but your sales team ends up chasing mid market deals on the coasts, what you're just bleeding efficiency.

00:03:53: and ultimately valuation.

00:03:54: We're also seeing GPs lean really hard into a proven growth lever, buy and build.

00:03:59: Nicola Ebbmeyer's research again, sixty-five percent of PEX it's planned for twenty-twenty-five had a buy and build component.

00:04:06: That's double the share from only five years back.

00:04:08: It's foundational now.

00:04:09: Yeah, totally foundational.

00:04:11: And it's driving aggressive consolidation, especially in previously fragmented areas like professional services.

00:04:17: Sebastian Esser gave that example of Aurelius watched them scapital, acquiring attacks and auditing for These were sectors where maybe tech synergies and scale were harder to find before, but now prime targets for operational roll-ups.

00:04:31: Okay, so that operational build-out, organic, or through acquisition, it all comes down to who is actually doing the work.

00:04:37: which brings us neatly to our second big theme, talent, leadership, and organizational coherence.

00:04:43: If operational excellence is the car, talent is really the only fuel that's going to make it go.

00:04:47: And there's a real sense of urgency.

00:04:48: you can feel it.

00:04:50: Matt Milligan shared this pretty candid chat with a PE investor.

00:04:55: The investor was nervous, basically, that their transformation plan wasn't executing fast enough.

00:05:00: Why?

00:05:01: Outdated talent, specifically mentioning long-tenured C players and weak performance management.

00:05:07: So now the firm is demanding a clear actionable talent strategy.

00:05:12: The runway for liquidity is getting shorter, you see.

00:05:14: Which often kicks off that search for the, you know, the mythical, perfect CEO.

00:05:20: Maxwell Salazar noted how PE firms often want this impossible mix.

00:05:24: Competitive drive, emotional intelligence, super meticulous agile.

00:05:28: All in one person.

00:05:29: It's kind of feudal, right?

00:05:30: Decades of research show there's no single magic factor predicting CEO success.

00:05:34: Exactly.

00:05:35: It's not about finding Superman or Superwoman.

00:05:37: It's about achieving fit, real alignment between the specific strategic needs of that moment, the role itself, and what the leader brings to the table.

00:05:45: If the firm can actually articulate what success really looks like in year one versus, say, year three, they immediately get an edge in recruitment.

00:05:52: It's about precision again.

00:05:53: And since finding that perfect full-timer, especially for niche roles, can be tough and expensive, we're seeing this rise in fractional executives.

00:06:01: Sharna Barrett detailed this.

00:06:03: Seasoned pros offering specialized expertise, but part-time.

00:06:07: Think fractional COOs or even chief transformation officers, CTOs.

00:06:12: Yeah, fractional talent is becoming a really crucial tool for managing that high level of organizational change, that flux.

00:06:19: You get those niche skills you need for maybe a rapid restructuring, but without the full-time overhead cost.

00:06:25: Makes it easier to drive those quick EBITDA and revenue wins bear.

00:06:28: it was talking about.

00:06:29: And just quickly before we move on, got to connect this back to the deal itself, Chris Riley's diligence roadmap emphasized something important.

00:06:35: You wade through all the financial models, the consultant reports, but the deal ultimately will always come back to culture, the fit between the target company's people and the PE firm's operating DNA.

00:06:45: If that alignment isn't there, the operational plan.

00:06:49: Kind of dead on arrival.

00:06:50: Culture is the ultimate execution risk.

00:06:53: Doesn't matter how good this spreadsheet looks.

00:06:55: Okay, let's pivot.

00:06:55: Segment three, liquidity, exits, and the market structure.

00:06:59: The macro picture here is, well, it's complex.

00:07:02: Dr.

00:07:03: Mark P. Bealitsa pointed out that deal value actually hit an all-time quarterly high, three hundred and ten billion dollars in Q-three twenty twenty-five, thanks to some mega deals.

00:07:12: But underneath that headline number, the whole market structure feels strained.

00:07:17: And that strain leads us to this pretty alarming zombie firm warning.

00:07:21: Ignacio Ramirez Moreno shared some incredibly direct insights from EQT's CEO, Perfrenzen.

00:07:27: He basically dropped a truth bomb.

00:07:28: Sixty-six percent of private capital firms haven't actually raised money in seven years.

00:07:33: Seven years and friends and predicted up to eighty percent could become zombies just managing existing assets because they can't raise fresh capital.

00:07:39: That

00:07:39: is that's a massive capital concentration risk brewing and it absolutely underscores the pressure cooker environment for exits.

00:07:45: Snorco food hansson noted that while the European exits surge something like eighty percent quarter over quarter The reason is that GPs are having to aggressively re-engineer liquidity.

00:07:54: They're not using the old pathways

00:07:56: Because the old pathways are basically broken, Mateo Lombardo's data for the first half of twenty twenty five showed only two percent of exits were IPOs.

00:08:05: Two percent.

00:08:06: That route is practically closed.

00:08:08: So instead, GPs are leaning heavily on things like continuation funds that was thirty five percent and sales to another PE sponsor, which was thirty six percent.

00:08:16: It's a fundamental shift in how the market works.

00:08:19: As Anastasia Dejoba pointed out, these GP-led secondaries and continuation fronts, they're now the main gap fillers for that collapsed IPO market.

00:08:27: Let's GPs extend the hold period for their best assets, maybe realize some value on others.

00:08:33: It's a workaround.

00:08:35: But it's a workaround that's creating some significant friction with LPs, the investors.

00:08:39: Stephanie Ball reported LPs are, let's say, actively unhappy with a lot of these GP-led secondary deals.

00:08:44: The main complaints seem to be poor transparency, sometimes eye-wateringly bad discounts when assets are transferred between funds, and just a general lack of clarity on fees and carry.

00:08:53: GPs are solving their liquidity problem, perhaps, but it might be creating a trust issue with their investors.

00:08:58: Which is a perfect segue to our final accelerant segment.

00:09:01: four, the AI imperative.

00:09:03: Look, this isn't some future trend anymore.

00:09:05: It's actively defining investment theses in operational strategy right now.

00:09:10: Mark Rodgerson asserted, AI is moving past being just a tactical tool.

00:09:14: It's becoming the primary engine of competitive advantage.

00:09:17: Yeah, and Carsten W noted how the conversation inside portfolio companies has completely shifted.

00:09:22: It's not digital transformation anymore.

00:09:24: The word is intelligence.

00:09:26: Tech isn't just an IT cost center.

00:09:28: It has to be woven right into the investment thesis, measured by its direct, quantifiable impact on growth and EBITDA.

00:09:36: But there's a huge gap between the talk and the reality, the implementation.

00:09:39: Kevin Montserrat really stressed that firms have got to rigorously distinguish real AI value, actual monetization, real operational efficiency from just superficial LLM integrations.

00:09:51: that might look cool, but don't actually move the needle financially.

00:09:54: Diligence needs to cut through the hype.

00:09:56: And that need is driving the demand for better valuation standards, isn't it?

00:10:00: Alex Lieberman predicted that by twenty twenty-six, someone, somewhere, will finally set a credible standard for calculating AI value creation ROI during diligence.

00:10:11: Acquires are asking the question now, but that rigorous methodology for turning an AI roadmap into measurable enterprise value, it's still being hammered out.

00:10:20: Well,

00:10:20: ultimately the biggest constraint on AI success probably isn't the algorithm itself.

00:10:25: It's the organizational foundation.

00:10:26: Kristoff Horlevine made this point very clearly.

00:10:29: AI success depends entirely on connecting it to internal data that actually has structure, integrity, and trust.

00:10:33: If you just point AI at messy, siloed data, it doesn't create insight.

00:10:37: It just amplifies the noise, which brings us full circle back to operational excellence.

00:10:42: You need that data discipline first.

00:10:44: That ties it all together perfectly.

00:10:46: So we're looking at a landscape really dominated by these operational builders, focusing on precise talent strategies, clean data, all while trying to navigate this really complex exit market defined by financial re-engineering.

00:11:00: The common thread seems to be, the old leverage game is over, success now is manufactured, it's meticulous execution.

00:11:07: The leverage game is definitely over.

00:11:09: But thinking about that eighty percent figure, if that many private capital firms might become zombies because they can't raise new funds, maybe the provocative thought for LPs isn't just about who can execute on their existing assets.

00:11:21: Maybe it's also who among those potential zombie firms actually has the capital structure and maybe the governance to wind themselves down properly for the benefit of their investors and who is just going to limp along clogging up the market.

00:11:34: That feels like the next structural risk.

00:11:35: People aren't talking about enough yet.

00:11:37: That's a

00:11:37: really powerful point to consider as you plan your strategy for the next few quarters.

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