Best of LinkedIn: Private Equity Insights CW 46/ 47

00:00:00: provided by Thomas Allguyer and Frennus, based on the most relevant linking posts about private equity in CW-FourSixFortySeven.

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

00:00:13: This edition is brought to you by our partners, Private Equity Insights and Informa.

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00:00:26: Welcome back to the deep dive.

00:00:28: So we spent the last while digging through the top private equity trends and insights on LinkedIn from calendar weeks forty six and forty seven and you know The overall feeling wasn't about flashy headlines at all.

00:00:39: It was really pragmatic.

00:00:41: He

00:00:41: was very pragmatic.

00:00:42: Yeah, I think Our mission here is to really distill what people are actually doing.

00:00:46: And we saw this really decisive move away from pure financial engineering.

00:00:50: It was all about complex carve-outs, strengthening platforms.

00:00:53: And this is the big one, pragmatic AI.

00:00:55: It's really a deep dive into pure execution.

00:00:57: OK, so let's start right there with execution.

00:01:00: Because for years, the whole story in PE was about maximizing leverage, wasn't it?

00:01:05: Oh,

00:01:05: absolutely.

00:01:06: But Wayne Marhelsky pointed out that this focus on just leverage actually left billions in value on the table.

00:01:11: It did.

00:01:12: And that perspective has, I mean, it's completely flipped.

00:01:15: The data from Bain's twenty twenty four report is pretty stark.

00:01:18: It shows that sixty percent, sixty of realized value now comes from operational improvements.

00:01:25: Sixty percent.

00:01:26: Yeah,

00:01:26: that's a paradigm shift.

00:01:27: Yeah.

00:01:28: PE firms are, well, they have to act like sophisticated consulting firms now, not just finance houses.

00:01:33: Wow.

00:01:33: Sixty percent.

00:01:34: That must put just unbelievable pressure on the CEOs they bring in.

00:01:38: I saw Carolyn Dewar highlighted this.

00:01:41: This brutal reality that a PE-backed CEO has what, about a thousand days?

00:01:45: Less

00:01:46: than three years.

00:01:46: To prove themselves.

00:01:47: It requires, I mean, just relentless clarity on the plan.

00:01:50: Right.

00:01:51: And an obsession with talent.

00:01:52: Yeah.

00:01:52: And if they don't show that progress fast, they are gone.

00:01:56: Hugh MacArthur's finding on this is kind of astonishing.

00:01:59: What was

00:01:59: that?

00:02:00: Up to seventy percent of CEOs are replaced during the whole period.

00:02:03: Seventy.

00:02:04: That's a staggering number.

00:02:05: I mean, the cost and the disruption of that many changes.

00:02:09: Does that really work with creating operational value?

00:02:12: It's a great question.

00:02:13: It definitely highlights how hard it is.

00:02:15: Yeah.

00:02:15: But also, you know, it forces a much more strategic view on who to hire next.

00:02:20: Zorin Rotenberg had a really persuasive take on this.

00:02:22: Okay.

00:02:23: He argued that CRO's chief revenue officers often make the ideal next CEOs, especially in that B to B middle market.

00:02:32: And why CRO specifically?

00:02:34: Because they're just inherently wired for growth and P&L discipline, that's their job.

00:02:39: They have to manage sales, marketing, sometimes product.

00:02:42: So they're already thinking like a general manager.

00:02:44: That makes sense from a numbers perspective.

00:02:46: There's also the soft side, the soft risks, right?

00:02:49: And this is where it can all fall apart.

00:02:50: Paul Press shared some data that was just,

00:02:52: wow.

00:02:52: The NPS score?

00:02:53: The NPS score, the operating partners, the PE firm sends in to help.

00:02:58: They got a negative net promoter score from almost forty percent of the CEO.

00:03:02: Which

00:03:02: is just critical.

00:03:03: That's a measurable value leakage problem.

00:03:05: It means trust is completely broken down.

00:03:09: Maxwell Salazar basically said the same thing, that the middle market fails on leadership, not strategy.

00:03:15: It's the messy human stuff, the founder who can't let go, the new C-suite exec who clashes with the culture.

00:03:22: So to see what it looks like when it's done right under insane pressure, you have to look at the big deals.

00:03:28: Patrick Collins did a fantastic recap of the Blackstone-Hilton deal.

00:03:32: The two thousand seven one.

00:03:33: Yeah, the twenty six billion dollar deal right before the financial crisis.

00:03:37: It's the classic case study because that fourteen billion dollar profit, it didn't come from a market bounce.

00:03:43: It came from three.

00:03:45: incredibly deliberate moves.

00:03:47: Okay, what were they?

00:03:48: First,

00:03:48: leadership.

00:03:49: They brought in Christopher Nasseta as CEO.

00:03:51: Second, they played the capital structure brilliantly, buying back their own debt at huge discounts when the market crashed.

00:03:57: And third, and this is the real lesson, they completely changed the business model.

00:04:01: They shifted Hilton from owning hotels to an asset-like franchising model.

00:04:05: So the lesson is the best deals are made in chaos, but the profit comes from actually fixing and transforming the business.

00:04:12: Exactly.

00:04:13: And that intensity around operations leads us very naturally to technology because tech is now the main lever to amplify all those gains.

00:04:22: Right.

00:04:23: Eric Jansen at PWC noted that AI is moving really quickly from just experimentation into actual execution.

00:04:30: Yeah,

00:04:30: everywhere.

00:04:31: Sourcing, diligence, portfolio value.

00:04:33: He

00:04:33: mentioned creating the finance function of the future.

00:04:36: And AI maturity is now a financial lever.

00:04:39: I mean, it's something firms are actually pricing into a deal.

00:04:41: Yeah, but not.

00:04:42: Sabunchi pointed out that governance.

00:04:44: quality is the key though.

00:04:45: It signals if the value is real or just.

00:04:49: speculative.

00:04:49: Investors want to see it in production, not just a pilot.

00:04:52: Exactly.

00:04:52: So for the mid-market, what are the quick wins?

00:04:55: Karsten W laid out three key areas.

00:04:58: First, data devalue, just unifying your data for smarter pricing.

00:05:02: Second, AI tied directly to the P&O.

00:05:04: Like reducing variance in demand planning.

00:05:06: Right.

00:05:06: And third, just getting the basic tech strategy aligned, modernizing cybersecurity, getting off those ancient ERP systems.

00:05:13: And we are seeing these incredibly.

00:05:17: You could call them blue-collar applications of this.

00:05:19: Sebastian Esser analyzed the deal by Hanover Finance.

00:05:23: The company was in sewer construction.

00:05:25: Okay, not exactly a glamorous tech play.

00:05:28: Not at all.

00:05:29: but they used AI-supported field service management and got a fifteen percent jump in technician utilization.

00:05:35: That's pure operational efficiency.

00:05:37: you can take right to the bank.

00:05:38: That's an immediate win, but you have to be careful, right, especially with more complex platforms.

00:05:43: Srinia and Mirage brought up the huge risk of variance when you implement AI in something like HCM.

00:05:49: Right,

00:05:49: human capital management.

00:05:50: So payroll benefits.

00:05:52: Right.

00:05:52: And the risk isn't the AI feature itself, it's all the edge cases.

00:05:56: Think about all the different Canadian provincial tax rules or German collective bargaining agreements.

00:06:02: That kind of variance can just kill a project.

00:06:04: It can halt a deal.

00:06:06: So instead of AI everywhere, Schrin and Mirage's advice is to start with AI-enabled instrumentation.

00:06:12: What does that mean in practice?

00:06:13: It's basically about focusing on internal monitoring first.

00:06:17: Track your mean time to resolve for tech incidents.

00:06:20: It's the boring, rigorous work that gives you clean data, which you absolutely need before you can scale the fancy AI stuff.

00:06:28: Okay, let's shift gears a bit to the transaction environment itself.

00:06:32: Patrick Kway noted that while we are seeing deal activity come back in some sectors.

00:06:36: Healthcare financial services.

00:06:37: Yeah, the valuation gaps are narrowing there.

00:06:40: But the exit conversation is still pretty sluggish.

00:06:43: That sluggishness is a massive headache.

00:06:46: Dr.

00:06:46: Sasha Hegg and Mueller estimated that hundreds of portfolio companies are basically stuck right now.

00:06:52: Stuck how?

00:06:52: They're not ready for an exit.

00:06:54: He stressed that readiness has to happen long before the transaction.

00:06:58: You need a consistent data cube, automated KPIs.

00:07:01: If you wait, a buyer will find an issue and just walk.

00:07:04: And the root of this whole slowdown comes back to pricing, doesn't it?

00:07:07: Danny Berger talked about this with Apollo's Scott Kleinman.

00:07:10: He used that pig through a Python metaphor.

00:07:13: Right.

00:07:13: For anyone who hasn't heard it, the pig is all those deals done at super high valuations when rates were zero.

00:07:19: The Python is today's tight market, which can't digest them.

00:07:23: So firms that overpaid are just waiting.

00:07:25: They're waiting for the market to come back to them, which is slowing everything down.

00:07:28: But good deals are still happening.

00:07:30: We saw Primera moving ahead with the sale of Golden Goose, the sneaker brand.

00:07:35: To

00:07:35: Hongshan Capital.

00:07:36: You on Reli noted this shows there's still a huge appetite for those really resilient, high-margin consumer brands.

00:07:43: And we're still seeing that roll-up logic play out.

00:07:45: Christoph Joost mentioned EVX Group buying blue data to consolidate vertical software in Germany and Italy.

00:07:52: And Rivian Capital acquiring Engelman Sensor to beef up its metering technology platform.

00:07:57: It's a focused, repeatable playbook.

00:07:59: Okay, let's pivot to financing because the lines between PE and lending are just getting blurrier and blurrier.

00:08:06: Juliana Bayjan highlighted how as private credit scales, these PE giants are basically turning into huge credit institutions.

00:08:14: It's a massive trend, but it brings up this huge regulatory question, right?

00:08:18: They're becoming systemic lenders without the same rules as banks.

00:08:22: The debate is about who is watching these non-bank lenders.

00:08:25: And the scale difference between the U.S.

00:08:26: and Europe is just, it's wild.

00:08:29: Nicola Edmire's analysis showed a U.S.

00:08:31: player like Apollo with what, almost six hundred and ninety billion?

00:08:34: Yeah, around there.

00:08:36: They are ten times bigger than a major European player like AXAIM, which is at about sixty-seven billion.

00:08:42: Why is the gap so huge?

00:08:44: It's really because the US industrialized private credit much earlier.

00:08:48: Europe is still so fragmented, both in its markets and its regulations, which makes it harder to scale.

00:08:53: So looking ahead now, let's talk institutional trends.

00:08:56: We have to talk about consolidation.

00:08:58: EQT's CEO per Friends, and he gave a pretty blunt warning.

00:09:01: Yeah,

00:09:02: Snorco Food Hansen shared his comments.

00:09:04: He warned that up to eighty percent of private capital firms could become zombie funds.

00:09:08: Can you just quickly define a zombie fund for us?

00:09:11: Sure.

00:09:12: It's basically a fund that's managing its old assets, but can't raise a new fund.

00:09:16: So it's not deploying any new capital.

00:09:18: It's just stuck.

00:09:19: Franson thinks ninety percent of all new capital will end up with just fifty to a hundred global managers.

00:09:25: That is intense concentration, but there's still room for the specialists,

00:09:29: right?

00:09:29: Oh, absolutely.

00:09:30: Especially in the middle market, where that sixty percent operational value creation really happens.

00:09:35: If you have deep expertise, there's still a lot of appetite.

00:09:38: And meanwhile, the wealth and private client channels are still a huge focus.

00:09:42: I saw Frederick Castingway, Alexander Mott, and Alisa Wood all talking about evergreen structures and co-investment.

00:09:48: Evergreen

00:09:49: structures are just funds designed to give high net worth investors continuous access without that typical ten-year lockup.

00:09:56: It's about building the infrastructure to scale that access.

00:09:59: And we're seeing that infrastructure being built.

00:10:01: Clearlake's acquisition of Pathway created a platform managing about a hundred and eighty-five billion, and Kenexi's louched fun flow to streamline the data and funding process.

00:10:11: And finally, we have to touch on this new frontier, sports and media.

00:10:15: Delmar Miller pointed out how institutional capital is completely reshaping sports ownership.

00:10:20: This isn't just a billionaire's hobby anymore.

00:10:22: It's a real asset class now.

00:10:24: Brian Davison cited over fifty billion dollars of PE money flowing into global sports in just five years.

00:10:32: That's creating whole new jobs like sports investment analysts.

00:10:35: Even college atherics are looking at it.

00:10:37: That proposed big ten two billion dollar private equity deal is a perfect example.

00:10:42: So when we look at all of the all this evolution where does it leave us?

00:10:46: Well it's interesting to look back.

00:10:47: Ricardo Vargas had a great reminder that the core LBO structure, combining equity and debt, it's not new.

00:10:54: JP Morgan used it back in one to buy Carnegie Steel.

00:10:57: The industry always evolves.

00:10:59: So what's the big question now?

00:11:00: The big question is whether this intense focus on operations, leadership and AI is just a cyclical thing because interest rates went up or if it's a permanent return to fundamental business management and whether these firms can really build that institutional muscle memory to do it consistently.

00:11:16: That is the essential challenge for the next decade.

00:11:18: If you enjoyed this episode, new episodes drop every two weeks.

00:11:22: Also, check out our other editions on venture capital, M&A, and strategy and consulting.

00:11:27: Thank you for joining us on this deep dive into the latest trends shaping the private markets.

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