Best of LinkedIn: Private Equity Insights CW 48/ 49

00:00:00: provided by Thomas Allgaier and Fremis based on the most relevant Lincoln posts about private equity in calendar weeks, forty eight and forty nine.

00:00:08: Fremis specializes in BDB market research for private equity teams to drive portfolio performance and value creation.

00:00:15: Welcome back to the deep dive.

00:00:17: Our mission today is pretty laser focused.

00:00:20: We're doing a strategic autopsy on the private equity landscape as we head into the end of the year.

00:00:25: Right.

00:00:25: This whole deep dive is built on the collective wisdom.

00:00:28: and some pretty brutal honesty that's been circulating on LinkedIn.

00:00:31: A lot of it's fueled by insights from big events like private equity insights, London and Supertern Africa.

00:00:36: And if you're in the space, you know the atmosphere has just, it's fundamentally changed.

00:00:41: The data we pull shows the industry has adopted what you could call a pragmatically defensive playbook.

00:00:47: So the era of just financial engineering and cheap debt guaranteeing alpha.

00:00:52: That's over.

00:00:53: That's

00:00:53: completely over.

00:00:54: Okay, let's unpack this.

00:00:55: So the core message seems clear.

00:00:57: The focus has shifted entirely away from the balance sheet into deep granular operational value creation.

00:01:03: Right.

00:01:03: That and an intense effort to solve for liquidity because the market for exits is, well, it's

00:01:09: sluggish.

00:01:10: So it's not about finding the next big leverage deal.

00:01:13: Exactly.

00:01:13: It's about making the current portfolio bulletproof.

00:01:17: I think if you're listening, you need to know that the market now demands demonstrable operational skill and rigorous governance, really above all else.

00:01:25: That sets the perfect stage for our first theme then, this new value creation mandate.

00:01:31: And here's where it gets really interesting.

00:01:33: The sources show a fundamental shift in how LPs define a successful GP.

00:01:38: They're moving beyond capital.

00:01:39: They want GPs who are actual business builders.

00:01:42: It's just decisive preference for the operator over the allocator, you know, and you see it especially in the lower mid-market.

00:01:48: We saw multiple leaders, people like Torg Barkholtz and Karsten Batran all saying the same thing, which is that the value creation engine now runs on growth and operational excellence, not just leverage.

00:01:59: It's not enough to be the spreadsheets guy anymore.

00:02:01: So the general partner needs to have more of an entrepreneurial mindset, really working hands on with the management team to to execute.

00:02:10: It feels a bit like they're being forced back to basics, almost like management consulting.

00:02:14: Precisely.

00:02:15: And Peter Kotz really emphasized this need for deep engagement.

00:02:18: I mean, if you're going to convince LPs you can deliver returns in this high cost world, you have to show you can deliver margin expansion and revenue growth internally.

00:02:27: And to make that measurable, I thought Dan Crammins had a brilliant point about simplifying that term everyone throws around, value creation.

00:02:34: Oh,

00:02:35: that was great.

00:02:36: He just stripped it back.

00:02:37: Right back to just five levers that actually create equity value.

00:02:40: And

00:02:41: that simplification is so critical for focus.

00:02:44: What are they?

00:02:45: It's growing revenue, expanding margin, strategic acquisitions, paying down debt or expanding the exit multiple.

00:02:51: That's it.

00:02:52: That's the entire universe.

00:02:53: Which brings us to operational discipline.

00:02:56: Luigi and Mark Hopkins were saying that operational excellence is the new backbone of returns.

00:03:02: I love the analogy from Luigi.

00:03:04: The

00:03:04: Formula One car.

00:03:05: Yeah, trying to scale a business without that discipline is like racing a Formula One car with a leaking fuel tank.

00:03:11: You might be fast, but you know, you are not going to finish the race.

00:03:14: And that level of discipline, it can only come from top talent.

00:03:19: Which makes the human element intensely strategic.

00:03:21: now it

00:03:22: does.

00:03:22: Kim Shanahan highlighted the shift we're seeing with CHROs and CPOs.

00:03:27: They're not administrative roles anymore.

00:03:28: They're strategic drivers totally essential for building the talent infrastructure You need to scale.

00:03:34: but focusing on talent like that.

00:03:35: Yeah, it exposes this massive leadership risk, which I found genuinely alarming.

00:03:41: You're talking about the CEO failure rate.

00:03:43: Yeah.

00:03:43: Maxwell Salazar cited research showing that nearly sixty percent of PE-backed CEOs fail within two years.

00:03:50: Sixty percent.

00:03:51: It's an incredible number.

00:03:53: It's an incredible rate of churn and failure.

00:03:55: And it's largely down to psychological pressure.

00:03:58: When a business moves into PE ownership, the speed and the intensity just... They accelerate dramatically.

00:04:04: Even really experienced CEOs can falter.

00:04:06: They get rigid or they start making impulsive decisions because of the stress.

00:04:10: It almost sounds like a structural flaw in the PE model itself.

00:04:14: This pressure cooker that breaks the very leaders you need most.

00:04:18: Well, it makes sense that firms are turning to behavioral data, personality insights, as Andrea Ficcini noted, just to de-risk these key hires.

00:04:27: And

00:04:27: that pressure isn't just on the CEO.

00:04:30: If it's breaking leaders, we have to look inside the investment team itself.

00:04:33: That's where Mark Boulier's point about the Dunning-Kruger effect becomes so relevant.

00:04:38: Ah,

00:04:38: the classic.

00:04:39: Thinking you know more than you actually do.

00:04:41: Precisely.

00:04:43: Boulier argued that the failure to recognize the limits of your own knowledge... It's just really underestimated in PE firms.

00:04:51: The investment team might mandate a new strategy, but they might overestimate the company's ability to actually do it.

00:04:56: So you need that partnership?

00:04:57: You need a tight, sustained partnership between the investment teams and the operating partners to bridge that gap.

00:05:03: The gap between the high-level vision and, you know, the ground-level execution, you can't just send a memo and expect change.

00:05:09: That focus on execution is probably the only thing that can save a GP, especially when we look at our next theme.

00:05:15: Exits, liquidity.

00:05:17: and valuation realism.

00:05:18: The market for successful exits is it's just severely constrained.

00:05:23: The

00:05:23: hold period data is stark.

00:05:25: I mean, it's proof of the sluggishness.

00:05:27: Dr.

00:05:27: Fabian Engels reported that global hold periods are soaring.

00:05:31: Soaring from what?

00:05:32: From about five point two years in twenty twenty to an anticipated six point six years by mid twenty twenty five.

00:05:39: That extra year and a half that puts immense strain on the traditional ten year fund model.

00:05:44: and on LP expectations.

00:05:46: So why the massive extension?

00:05:48: Is it just about valuation gaps?

00:05:50: That's part of it.

00:05:50: Valuation gaps, high borrowing costs, making refinancing tough, and, let's be honest, inconsistent performance across portfolios that just haven't adapted.

00:05:58: Okay,

00:05:58: so if the exit market is constrained, what does it actually take to sell a business now?

00:06:03: Patrick Quay laid out the new standard.

00:06:05: He said companies have to be exit compelling, not just exit ready.

00:06:08: And what's the difference between ready and compelling in practice?

00:06:11: Ready means your books are clean.

00:06:13: Compelling means you've demonstrated resilience and predictable growth.

00:06:17: that justifies a premium valuation, even in a shaky environment.

00:06:21: So you need to prove it.

00:06:22: You have to prove it.

00:06:23: Chris Paxton highlighted three things portfolio companies need.

00:06:27: First, build a clear equity story early.

00:06:29: Second, tighten your data discipline for real-time visibility.

00:06:33: And third, you have to stress test your operations to prove you can handle different market scenarios.

00:06:39: Zorian Rotenberg also talked about this, focusing on GTM excellence.

00:06:43: What does GTM excellence really mean here?

00:06:46: We're just talking about cleaning up the sales funnel and the CRM.

00:06:50: We are, but it's more than that.

00:06:51: It means removing all the friction from diligence.

00:06:54: You want to make sure the buyer doesn't spend weeks just trying to verify your customer data or sales projections.

00:07:00: It means your systems prove your go-to-market strategy is repeatable and scalable, not a one-off miracle.

00:07:05: And all this realism is hitting the price tags, right?

00:07:08: What happened to the huge exit uplifts we used to see?

00:07:10: They're gone.

00:07:12: Stefan Westag shared some really compelling data showing that Exit uplifts are now mostly in the zero to ten percent range.

00:07:18: Zero to ten.

00:07:19: Historically was what, thirty, forty percent?

00:07:21: At

00:07:21: least.

00:07:22: But this doesn't necessarily mean value wasn't created.

00:07:25: It probably means, as West Dike suggests, that those outdated, aggressive marks from the peak twenty-twenty-one bubble have finally been corrected.

00:07:34: Continuation vehicles, semi-liquid funds.

00:07:37: They're enforcing this realism.

00:07:39: That

00:07:39: brings us right to liquidity solutions.

00:07:41: With traditional exits stalled, GP-led solutions like continuation funds and strip sales are.

00:07:47: They're totally mainstream now.

00:07:48: They're survival tools.

00:07:50: Alfifius Moore and Valentina Gentile both noted this.

00:07:53: They're used to manage liquidity for LPs who need returns and to extend the life of a great asset that just isn't ready for a sale.

00:08:00: But there's a risk there, isn't there?

00:08:01: That these CVs are just kicking the can down the road on a troubled asset.

00:08:05: That

00:08:05: tension is very real.

00:08:07: And the United Sites Services case, which Harold Berlinick shared, is a stark cautionary tale.

00:08:12: That was the portable toilet business, wasn't it?

00:08:14: Built on a ton of debt and add-ons.

00:08:16: Exactly.

00:08:17: Platinum Equity grew its revenue, then transitioned it into a continuation vehicle in twenty twenty one.

00:08:22: But by twenty twenty five, that highly leveraged business in a cyclical industry.

00:08:27: It was in distress.

00:08:29: And the result.

00:08:29: An estimated one point four billion dollars in losses for the PE backers.

00:08:34: It just highlights that no amount of structural gymnastics can overcome fundamental flaws like a high debt burden or weak operations.

00:08:42: So operationally sound businesses can use CVs, but weak ones just get a longer path to failure.

00:08:47: Speaking of structure, Cosmo Donati mentioned a really interesting innovation, securitization.

00:08:52: This is a major efficiency leap for private markets.

00:08:55: Securitization is being used as a scalable, transparent alternative to the old special-purpose vehicles, or SPVs, for structuring deals.

00:09:03: Okay, for our listener, how does a securitization certificate with an ISA number actually make things easier than a traditional SPV?

00:09:09: It just standardizes and speeds up institutional distribution.

00:09:13: The slow, expensive custom onboarding you get with SPVs is replaced by transparent, easily transferable certificates from a big financial institution.

00:09:22: It streamlines the whole process, making private assets way more efficient to trade and track.

00:09:27: Now let's pivot to technology, specifically AI.

00:09:30: Edward Wong flagged AI as a strategic imperative, but... The adoption seems to be running into a paradox.

00:09:37: It

00:09:37: absolutely is.

00:09:38: It mirrors the whole operational value creation theme.

00:09:41: David Marsh observed that a lot of funds are relying on AI internally, you know, for sourcing, for diligence.

00:09:47: Right,

00:09:47: Jerome Padilla noted that too.

00:09:48: But its actual use inside the portfolio companies is still surprisingly minimal.

00:09:53: So why the friction inside the port goes?

00:09:55: If the tech is there, why aren't they using it to drive those margins?

00:09:59: Marsh pointed to three core bottlenecks.

00:10:01: First, and this is the most damaging, is poor data quality.

00:10:04: AI is useless if your data is a mess.

00:10:06: Second, a lack of sea level fluency in AI.

00:10:09: The leadership just doesn't know what questions to ask.

00:10:11: And finally, it's just hard to quantify that immediate ROI.

00:10:15: So the company hasn't earned the right to automate yet.

00:10:17: It's like trying to put a rocket engine on a rusty wagon.

00:10:20: That's a perfect analogy.

00:10:21: The consensus from people like Eric Bernder and Marsh is that the strategy has to be progress over perfection.

00:10:27: The key phrase is... earning the right to automate.

00:10:31: Meaning you establish rigorous process discipline and standardized workflows before you bring in AI tools.

00:10:37: Exactly.

00:10:38: You can't automate route planning for a logistics company if half your drivers are using spreadsheets and the other half are using different tracking systems.

00:10:45: Standardize

00:10:46: first, AI second.

00:10:48: but is AI useful early in the deal cycle?

00:10:50: Oh, absolutely.

00:10:51: Especially for de-risking.

00:10:53: Jerome Potier confirmed its use in sourcing and diligence, but Shrini Anamaraju highlighted that using AI diagnostics in the first hundred days post-acquisition is an invaluable... de-risking lever.

00:11:04: How so?

00:11:05: It can stress test volatility, flag hidden operational risks, and just vastly improve your forecasting precision.

00:11:11: It protects the projected IRR right from the start.

00:11:14: Let's shift continents now and focus on the insights from Superreturn Africa, twenty twenty five.

00:11:19: Jason Hamilton noted that the whole investment dialogue there has shifted.

00:11:23: It really has.

00:11:24: It's moved from a narrow focus on capital to emphasizing capacity.

00:11:28: And that is the crucial pivot.

00:11:30: It means the market gets that capital is available.

00:11:33: The focus now has to be on how to structure and price risk properly and how to build the operational capacity to absorb that

00:11:40: capital.

00:11:41: And the fundraising environment there sounds exceptionally selective.

00:11:45: Brutal

00:11:45: is the word.

00:11:46: Simon Turner's data was striking.

00:11:48: A massive eighty-five percent of capital commitments went to just three large funds.

00:11:53: Wow.

00:11:53: And that exclusivity is driven by LPs demanding strong governance, clearer DPI clarity, and credible return strategies from day one.

00:12:02: That's what Martin Wariova relayed.

00:12:03: He also pointed out that African markets just don't fit the traditional ten plus two fund timelines, which means you need alternative structures.

00:12:10: But despite the hurdles, the opportunity is still there, provided the focus stays local and operational.

00:12:16: That's the consensus.

00:12:17: Melissa Mercedes M confirmed that Africa has the local talent, the innovation, the local capital.

00:12:24: Zahir Koja agreed, noting the continent has shifted from asking where's the talent to realizing Africa has Africa.

00:12:32: And the repeatable theses are in essential sectors.

00:12:35: Right, clustering around digital infrastructure, food and agriculture, travel platforms, that sort of thing.

00:12:41: You

00:12:41: know, Sara Flora has brought up a fascinating point that brings us full circle back to capacity, supporting founder psychological fitness.

00:12:49: Yeah, that was interesting.

00:12:50: She

00:12:50: said, sixty five percent of startup failures come from people challenges, not product problems.

00:12:56: So in a high growth market like Africa, supporting a founder's inner capabilities isn't a luxury, it's essential infrastructure.

00:13:02: It is.

00:13:03: It's recognizing the immense pressure these leaders are under.

00:13:06: And you know, in a broader global context, Alex Barr highlighted that LPs worldwide are looking to rebalance their portfolios away from a heavy US bias.

00:13:14: They want more differentiated exposure in African UK and Asian private markets.

00:13:18: That's a long-term tailwind.

00:13:19: So what does this all mean?

00:13:21: I think the major takeaway from the last couple of weeks is this universal return to operational reality.

00:13:27: GPs have to be hands-on operators.

00:13:30: The leverage party is over.

00:13:31: And liquidity requires creativity through things like continuation funds and innovations like securitization.

00:13:37: And maybe most importantly, technology like AI has to be earned through rigorous process discipline first.

00:13:44: And if you connect that operational realism to the bigger picture, you land on this really profound paradox that Nicola Ebbmeyer raised.

00:13:53: Think about the scale.

00:13:54: The entire US public market is roughly seventy trillion dollars.

00:13:58: Private equity is around six trillion.

00:14:00: Seems small in comparison.

00:14:02: It does.

00:14:02: Yet, if all the essential infrastructure companies that PE owns, the healthcare providers, logistics firms, energy systems, if they vanished overnight, the world would stop.

00:14:12: That's a powerful way to frame it.

00:14:13: PE owns the operational backbone of the economy, even if its market size looks smaller.

00:14:18: Exactly.

00:14:18: Yet the listed private equity firms are consistently trading at a deep discount to their net asset value.

00:14:23: And this raises a really important question for you, the listener.

00:14:27: If PE fundamentally owns the critical infrastructure for daily life, why is the transparent value of listed PE trading so cheaply?

00:14:35: And what does that persistent discount say about the true, long-term, hard-to-measure value creation that's happening outside of constant public scrutiny?

00:14:44: It really makes you wonder where the real alpha is being created today.

00:14:47: A question worth considering is you evaluate where that real value lies.

00:14:51: That wraps up this deep dive into the private equity trends of calendar weeks forty-eight and forty-nine.

00:14:56: If you enjoyed this new deep dive, drop every two weeks.

00:14:59: Also, check out our other editions on Venture Capital, M&A, and Strategy and Consulting.

00:15:03: Thank you for joining us and make sure to subscribe so you don't miss the next one.