Best of LinkedIn: Private Equity Insights CW 02/ 03

00:00:00: Provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about private equity.

00:00:04: in CWO two and O three, 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 partner Informa.

00:00:16: Don't miss out on their upcoming conferences, Super Return Saudi Arabia and Super Return Secondaries Europe.

00:00:21: Find the links to the conferences in the description.

00:00:25: Welcome back.

00:00:25: So today we're digging into the private equity landscape, looking at the first couple of weeks of twenty twenty six.

00:00:31: And, you know, if I had to put a label on the mood, I'd call it cautious acceleration.

00:00:36: Cautious acceleration.

00:00:37: I like that.

00:00:38: It feels very different from where we were, say, six months ago.

00:00:42: The whole narrative was survive until twenty five, right?

00:00:45: Just battling that that liquidity deadlock where nobody was bought and nobody was selling.

00:00:49: But looking at the post from the last two weeks, it.

00:00:52: It really feels like the ice is finally starting to

00:00:54: crack.

00:00:54: The ice is definitely breaking, you're right.

00:00:56: But I think we need to be very clear from the start, the water we're jumping back into.

00:01:01: It's different.

00:01:01: This isn't a return to the zero interest rate party of twenty twenty one.

00:01:05: The big theme isn't just that capital is flowing again.

00:01:08: It's the intense selectivity of that flow.

00:01:11: So the rising tide is not lifting all boats anymore.

00:01:15: Far from

00:01:15: it.

00:01:15: In fact, I'd say some boats are going to sink while others, the really strong ones, just speed away.

00:01:20: It is all about operational strength and specific asset quality.

00:01:24: Now, if you don't have that, you're still stuck.

00:01:26: And we have a lot to get through today.

00:01:27: I'm seeing stuff on the macro outlook, the reality of AI, and some pretty startling data on leadership churn.

00:01:35: We do.

00:01:35: So where should we start?

00:01:36: Let's start at the top, the macro view.

00:01:38: We've got an analysis here from Dr.

00:01:39: Alexander Hitteroth on the Brookfield, twenty twenty six outlook.

00:01:43: What's the headline there?

00:01:44: The headline is discipline.

00:01:46: Call in simple.

00:01:48: Hitteroth points out that even though capital markets are reopening, success is being defined by a really specific kind of discipline.

00:01:55: LPs are now asking, how do we access real growth and AI in the energy transition and in reindustrialization?

00:02:02: The three biggest buzzwords right now?

00:02:04: They are.

00:02:05: But the how is what matters.

00:02:07: They're not just throwing money at a theme.

00:02:09: They want PE firms that are focused on operational transformation.

00:02:13: It's not enough to just, you know, buy a company, load it with debt.

00:02:18: and hope for the best.

00:02:19: Hope

00:02:19: the multiples go up.

00:02:20: Exactly.

00:02:21: You actually have to build the thing.

00:02:22: You have to build the infrastructure for that energy transition or that AI platform.

00:02:27: And that connects directly to what Jonas Plus is seeing.

00:02:29: He calls it the great bifurcation.

00:02:32: Which is a great way of putting it.

00:02:33: The market is splitting in two.

00:02:35: Plus is seeing this massive flight to quality.

00:02:38: And he makes a crucial point about where returns are actually coming from.

00:02:42: Right.

00:02:43: In the past, You could rely on multiple arbitrage.

00:02:47: You buy at ten X, sell at twelve X just because the market got hotter.

00:02:50: And you'd juice the return with a ton of cheap leverage.

00:02:53: Right.

00:02:54: That game, according to plus, is over.

00:02:56: Returns now have to come from margin expansion.

00:02:58: That's your operational alpha.

00:02:59: You have to physically make the company run better.

00:03:02: So the easy money is gone.

00:03:04: You have to be a builder, not just a trader.

00:03:06: OK, so that brings us to geography.

00:03:09: We're seeing some really interesting shifts away from the typical US centric view.

00:03:14: Henry McVeigh at KKR is making a pretty bold call.

00:03:17: McVeigh is always worth a read.

00:03:19: And his conviction right now is that international equities, specifically Japan, Korea, and emerging markets like India deserve a much closer look than the US.

00:03:29: Which seems a bit counterintuitive, doesn't it?

00:03:31: I mean, the US is still seen as the main engine.

00:03:34: Is this just a valuation play because the S&P is so hot?

00:03:37: Valuation is a huge piece of it.

00:03:39: Sure, the US is priced for perfection, but McVeigh also points to structural change.

00:03:44: In Japan and Korea, for example, you're seeing corporate governance reforms that are actually unlocking value.

00:03:50: Ah,

00:03:51: so it's not just that they're cheap.

00:03:52: They're actually changing their behavior.

00:03:53: Exactly.

00:03:54: They're being forced to be more shareholder friendly.

00:03:57: Whereas in the US, a lot of the potential upside, even from AI, might already be baked into the price.

00:04:02: And speaking of Asia, Hamish McDonald at BlackRock is looking at real estate.

00:04:06: He's talking about the APAC lag.

00:04:08: Yeah, this is a really smart concept.

00:04:10: Real estate tends to reprice in ways around the globe.

00:04:14: The U.S.

00:04:15: and Europe correct it first.

00:04:17: McDonald's point is that APAC is lagging that correction, but it combines that cyclical repricing with real structural growth.

00:04:24: So while everyone's staring at empty office buildings in New York, smart

00:04:27: money might be looking at logistics or residential in Asia where the long-term trends are still pointing straight up.

00:04:33: Let's bring it back to deal volume.

00:04:35: Dr.

00:04:36: Ralph Hugh Bronegal says mega deals are returning.

00:04:38: We've seen a few.

00:04:39: Does that mean the frenzy is back?

00:04:41: No, and Bronegal is very careful about this.

00:04:43: He says it's not volume for volume's sake.

00:04:46: It's all about conviction.

00:04:48: Conviction?

00:04:49: What does that mean in practice?

00:04:50: It means that a big deal only happens if the investment thesis is absolutely crystal clear.

00:04:55: No one's taking a flyer.

00:04:56: If a PE firm writes a billion dollar check today, you can bet they have mapped out exactly how they plan to exit that thing before the ink is even dry.

00:05:05: It's surgical.

00:05:06: Speaking of surgical, let's talk about the tool everyone's trying to use, AI.

00:05:11: For a couple of years, every deck had an AI strategy slide.

00:05:15: But we're past the, wow, look at this phase, aren't we?

00:05:18: Oh, definitely.

00:05:18: The honeymoon is over.

00:05:20: Didem Unatech provides a massive reality check.

00:05:23: She says AI has graduated from an experiment to a core operating expense.

00:05:29: Which

00:05:29: sounds expensive.

00:05:30: Experiments are supposed to be cheap.

00:05:32: Well... That's the whole shift.

00:05:34: She points out that while overall enterprise budgets for AI are up, the innovation budgets, the money for just playing around, are actually down.

00:05:41: So companies are consolidating.

00:05:43: Exactly.

00:05:43: They're not using twenty different cool AI startups anymore.

00:05:47: They are picking three to five strategic platforms and going deep.

00:05:50: And Yves Bonifant supports this.

00:05:52: He says the mindset has shifted from let's test gen AI to industrialize what moves EBITDA.

00:05:59: That is the phrase the year for me.

00:06:00: Yeah.

00:06:01: Industrialize what moves EBITDA.

00:06:03: If it doesn't improve the bottom line, it's just a distraction.

00:06:05: So industrializing AI, that means taking it out of the lab and putting it on the factory floor.

00:06:10: or the call center or the supply chain.

00:06:13: It's the boring stuff that saves millions of dollars.

00:06:16: Automation, better reporting, things like that.

00:06:19: And this isn't just about the portfolio companies, right?

00:06:22: It's the deal process itself.

00:06:25: Steve Budd was talking about financial due diligence.

00:06:27: Yeah, this is fascinating for anyone in M&A.

00:06:30: Budd's argument is that AI can spot outliers and weird patterns in a target's data way faster than a human can.

00:06:38: It gets you to a no-go decision.

00:06:40: Much, much faster.

00:06:41: Which saves a fortune on lawyers and accountants.

00:06:43: A huge amount.

00:06:45: You want to know if a deal is bad on day two, not day forty.

00:06:48: But he does stress that human judgment is still key for providing the context.

00:06:52: Right.

00:06:53: AI spots the dip in Q-three revenue.

00:06:55: A human has to figure out why.

00:06:57: Precisely.

00:06:58: But then you have Tom Stables at lockstep.

00:07:00: He says the real value isn't even there.

00:07:02: It's not about making the deal team more efficient.

00:07:04: And I tend to agree with him.

00:07:05: Shaving a few hours off a deal team's workflow is nice, I guess.

00:07:09: It helps the PE firms own margins, but applying AI to the actual portfolio companies to drive real EBITDA uplift.

00:07:16: That's

00:07:17: where the big returns are.

00:07:18: That's where you get your three X or four X. That's the operational alpha we started with.

00:07:22: And Karsten W ties this all the way to the end of the journey to the exit.

00:07:27: He uses this phrase data to value.

00:07:29: This

00:07:30: is a big mindset shift.

00:07:31: Usually exit prep is a mad scramble in the last six months of a hold.

00:07:35: The data room fire drill.

00:07:36: Exactly.

00:07:37: He's saying exit readiness needs to be an always-on state.

00:07:41: If your data is clean from day one, you can answer any buyer question immediately.

00:07:45: It reduces deal fatigue.

00:07:47: Because uncertainty kills deals.

00:07:49: And clean data kills uncertainty.

00:07:51: It's that simple.

00:07:52: That's a perfect segue.

00:07:53: You can have all the data in AI in the world, but if you don't have the right people, it doesn't matter.

00:07:58: And the data on leadership in PE is, honestly, it's brutal.

00:08:03: It's startling.

00:08:04: Lee McCabe dropped a stat that should keep every LP up at night.

00:08:07: Nearly seventy percent of CEOs in PE backed companies are replaced during the hold period.

00:08:12: Seventy percent.

00:08:13: So if a PE firm buys my company, I have less than a one in three chance of still being there in a few years.

00:08:18: That's what the numbers say.

00:08:20: And it often happens in the first year.

00:08:22: McCabe argues it's not just a candidate problem.

00:08:25: It's a system problem.

00:08:26: So why is the churn so high?

00:08:27: Are PE firms just too demanding?

00:08:30: It's

00:08:30: more nuanced.

00:08:31: Scott Engler explains it with a great concept.

00:08:33: phase fit.

00:08:34: Phase

00:08:34: fit.

00:08:34: Okay, unpack that for us.

00:08:36: So think about it this way.

00:08:37: A CEO might be an absolute genius at phase one, the founder led growth, the big vision.

00:08:43: But once a PE firm comes in, the company enters phase two.

00:08:47: Which

00:08:47: is about stabilization, cost cutting, systems.

00:08:50: All of it.

00:08:50: Margin improvement.

00:08:52: The skills are totally different.

00:08:54: The zero to one visionary isn't always the right person for the one to ten scaling phase.

00:08:58: Engler says boards overvalue confidence in pedigree and undervalue the actual fit for the company's current reality.

00:09:05: And

00:09:05: Maxwell Salazar notes that Blackstone is trying to get ahead of this by treating leadership as a material investment risk.

00:09:11: Right.

00:09:11: It's not soft and squishy stuff for them.

00:09:14: They assess leadership with the same rigor as financial metrics.

00:09:17: Because if you get the leadership wrong, the entire model breaks.

00:09:21: And it seems the CFO is in the hot seat just as much as the CEO.

00:09:25: We saw insights from Emma Jaggers and Neil French on this.

00:09:29: The PECFO role is just different.

00:09:32: It's not about reporting history.

00:09:34: They describe the CFO as sitting in the no man's land.

00:09:38: between the numbers and the operations.

00:09:40: No man's land sounds dangerous.

00:09:42: It is.

00:09:43: They're the bridge.

00:09:44: Yeah.

00:09:44: They have to be forward-looking, predicting cash flows, driving strategy.

00:09:48: If a CFO is just telling you what you spent last month, they're not doing the job.

00:09:53: Michael Burcham breaks this whole value creation journey into three acts, which I found really useful.

00:09:58: A

00:09:58: great framework.

00:09:59: Yeah.

00:09:59: Act one is creating value, so strategy.

00:10:01: Act two is delivering value execution systems.

00:10:05: Act three is capturing value the exit.

00:10:07: And

00:10:07: you need different leadership for each act.

00:10:09: Often you do, which brings us to a fascinating point from Jack Sired about interim leaders.

00:10:13: I always thought of an interim CEO as just a placeholder.

00:10:16: Right, someone to keep the seat warm.

00:10:17: Sired flips that on its head.

00:10:19: He says sometimes an interim is hired specifically to absorb tension.

00:10:23: Observe tension?

00:10:24: Like a shock absorber for a car?

00:10:26: Exactly like that.

00:10:27: Imagine a company with deep cultural problems or painful layoffs that need to happen.

00:10:33: If you throw your new star CEO into that mess, you could burn them out in six months.

00:10:38: So you send in the interim to do the dirty work?

00:10:41: To

00:10:41: do the dirty work.

00:10:42: They absorb the friction, make the unpopular choices, and then the permanent hire can come in on a white horse to a much cleaner situation.

00:10:49: They're a heat shield.

00:10:50: That is a brilliant strategic use of talent.

00:10:53: OK, we've covered macro, tech, and people.

00:10:56: Let's finish with the money itself.

00:10:58: Capital structures, exit dynamics.

00:11:00: Walker-Diable actually defends illiquidity.

00:11:02: He does.

00:11:03: In a world of crypto and day trading, he argues PE's illiquidity is a feature, not a bug.

00:11:10: It forces discipline.

00:11:11: Because you can't panic so.

00:11:12: You're

00:11:12: locked in for five, seven years.

00:11:14: It stops you from making emotional decisions during volatility and just lets the capital compound.

00:11:18: But LPs do eventually need their money back, and Regis Hagler and Nate Collins are seeing a trend of early exits.

00:11:25: This is the other side of that pressure.

00:11:27: They're seeing fund managers sell their winners early, sometimes in under three years, just to show LPs they can return capital.

00:11:34: Look, we returned some cash, now please commit to our next fund.

00:11:38: That's the motivation.

00:11:39: The risk, though, is selling before those operational changes are really baked in.

00:11:43: It can be like passing a hot potato.

00:11:45: And on the other end of the spectrum, Casper Wichman is talking about trophy assets.

00:11:50: This is where a GP holds onto an asset for a very long time using something called a continuation vehicle.

00:11:56: They move it from one of their old funds into a new one.

00:11:58: they also manage.

00:12:00: Correct.

00:12:01: And Richmond's cynical take is that they do this to avoid testing the market.

00:12:05: They get to control the valuation.

00:12:07: And more importantly, they get to keep collecting fees on that asset for another few years.

00:12:12: Which raises some big questions, right?

00:12:14: Who's setting the price?

00:12:15: That's the key question.

00:12:17: Doug Krupa at KKR warns that advisors need to ask really tough questions about how these positions are being valued.

00:12:24: Is it marked to market or marked to model?

00:12:26: Marked to my model, which can be very optimistic.

00:12:28: It

00:12:28: can be.

00:12:29: I want to wrap up with a story from So Hinshaw that just breaks the entire mold.

00:12:34: The story of Hoffman Media.

00:12:35: This is such a great counter narrative.

00:12:38: The usual story is founder sells to PE, PE sells to bigger PE, founder sales off into the sunset.

00:12:44: But that's not what happened here.

00:12:45: Not

00:12:46: at all.

00:12:46: The founders bought the PE investors out.

00:12:48: Wow.

00:12:49: The PE firm had a minority stake for eight years.

00:12:52: The Hoffman family bought it back.

00:12:54: The PE firm still made a twenty seven percent IRR, which is a fantastic return.

00:12:59: But the family kept long term control.

00:13:01: I love that.

00:13:02: It shows that an exit doesn't have to mean selling the soul of the company.

00:13:06: It shows that PE can be a tool for a specific stage of growth, a partnership, not necessarily the end of the line for the founder.

00:13:13: So after all that, what does this mean for you listening?

00:13:16: The market is moving, but it's cautious acceleration.

00:13:19: AI is about execution, not experiments.

00:13:21: And leadership churn is a huge systemic risk.

00:13:24: you have to manage with phase fit.

00:13:25: If I can leave you with one final thought, is to really dig into that phase fit concept.

00:13:31: Whether you're an investor, an operator, or a consultant, you need to be asking, are the people in charge, and that includes you, the right people for this specific phase of the company's life?

00:13:43: because the data says we're getting that wrong more often than we think.

00:13:47: A great thought to end on.

00:13:48: If you enjoyed this episode, new episodes drop every two weeks.

00:13:52: Also check out our other editions on venture capital, M&A, and strategy and consulting.

00:13:56: Thanks for listening.

00:13:57: See you next time.