Best of LinkedIn: Private Equity Insights CW 04/ 05

00:00:00: Provided by Thomas Hall-Geyer and Frenes.

00:00:02: Based on the most relevant LinkedIn posts about private equity in CWO four and O five.

00:00:08: Frenes 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.

00:00:18: Don't miss out on their upcoming conference, Super Return Secondaries Europe.

00:00:21: Find the link of the conference in the description.

00:00:24: Welcome back.

00:00:25: We have got, well, a massive stack of updates for calendar weeks four and five of twenty-twenty-six.

00:00:31: And I have to say that whole survive till twenty-five mantra we saw everywhere last year, it already feels completely obsolete.

00:00:38: It really does.

00:00:38: That slogan, it always implied we just had to hold our breath, wait for rates to drop, and then, you know, the party would restart.

00:00:44: Exactly.

00:00:45: Like it was twenty-twenty-one all over again.

00:00:47: But the sources we're digging into today, they suggest that's not happening.

00:00:51: We're not just going back to business as usual.

00:00:53: This feels more like a structural reset.

00:00:56: The era of, let's say, cheap money and financial engineering is in the rearview mirror.

00:01:00: And the new road, well, it seems to be paved with operational grit, a really brutal war for talent, and a credit landscape that looks nothing like it did five years ago.

00:01:10: That

00:01:11: is the perfect way to frame it.

00:01:12: So our mission today is to really unpack what this market reset twenty twenty six actually looks like on the ground.

00:01:20: Right.

00:01:21: We're not just going to look at the headlines.

00:01:22: We need to get into the granular details, the value creation playbooks that are actually working right now.

00:01:28: Because if you're still running the old playbook in twenty twenty six, you're

00:01:32: going to get run over.

00:01:33: Simple as that.

00:01:34: OK, so let's start at the top.

00:01:35: The macro outlook.

00:01:36: There's this palpable sense in the post from these weeks that we've hit an inflection point.

00:01:41: What are the hard numbers telling us?

00:01:42: Well, the headline number comes from Gavin G. Minder at KPMG, and it's a big one.

00:01:47: Global PE investment hit two point one trillion dollars in twenty twenty five.

00:01:51: Two point one trillion.

00:01:52: That's a four year high.

00:01:53: It is.

00:01:54: But here's the nuance, the part you have to catch.

00:01:56: Deal volume.

00:01:57: So the actual count of transactions that went down.

00:02:00: Wait, that's counterintuitive.

00:02:02: So more money's moving around.

00:02:04: but for fewer deals.

00:02:05: Exactly.

00:02:06: It's a classic flight to quality.

00:02:08: Investors are writing much, much bigger checks, but only for the absolute best assets.

00:02:13: So all that mid-market chop.

00:02:15: the sort of mediocre deals that got funded easily a few years back.

00:02:19: That's

00:02:19: just not happening.

00:02:20: We're seeing this consolidation into fewer, larger transactions.

00:02:24: And that lines up perfectly with what Eddie Donvez was pointing out about Blackstone.

00:02:28: He mentioned they're lining up one of the largest IPO pipelines in their entire history.

00:02:32: Right.

00:02:33: And their president, John Gray, he used a phrase that really stuck with me.

00:02:36: He said, the deal environment has hit escape velocity.

00:02:40: Skate velocity.

00:02:41: I like that.

00:02:42: It implies we were stuck in that gravity well of high rates and low liquidity, and now we finally broken free.

00:02:48: It's a very, very bullish signal.

00:02:51: And Donmez points to the Medline IPO as the proof of concept.

00:02:54: It was

00:02:54: a huge exit.

00:02:55: A massive exit.

00:02:56: And it signals to the rest of the market that the IPO window isn't just, you know, open a crack.

00:03:01: It's wide open for the right companies.

00:03:03: But I want to push on that escape velocity idea a little.

00:03:06: Because it's not just about selling companies, right?

00:03:09: It's about where the buying power is coming from.

00:03:12: Mitch Berlin flagged a regulatory change that I think is still under discussed.

00:03:17: The executive order allowing private equity in for one case.

00:03:21: This is a huge structural shift.

00:03:23: Berlin estimates this could unlock after six hundred billion dollars.

00:03:27: Six hundred billion.

00:03:28: That is just a massive injection of retail capital into what has always been a purely institutional game.

00:03:35: It changes the entire liquidity profile, but, you know, it also changes the responsibility.

00:03:39: Managing pension money for Main Street is very different from managing it for a sovereign wealth fund.

00:03:44: Sure.

00:03:45: And speaking of massive numbers, Scott Voss is predicting we're going to see the rise of the five T club.

00:03:50: Five trillion dollar asset managers.

00:03:52: I mean, five trillion is basically the GDP of Japan.

00:03:54: That is an absurd amount of concentration.

00:03:56: It

00:03:57: is.

00:03:57: And Voss points out.

00:03:58: that to get there, these firms are relying heavily on NAV lending.

00:04:01: We should probably define that quickly.

00:04:03: for anyone not deep in the finance weeds.

00:04:05: NAV is net asset value lending.

00:04:07: Think

00:04:08: of it like taking a second mortgage out on your house to pay for renovations instead of selling the house.

00:04:14: In PE, the fund takes a loan against its whole portfolio of companies.

00:04:19: To do what?

00:04:19: Pay a dividend?

00:04:20: Buy more time.

00:04:21: both to generate liquidity.

00:04:23: Voss calls it private equity gold for twenty twenty six.

00:04:27: But is that safe?

00:04:28: I mean, it sounds a lot like leverage on top of leverage.

00:04:31: And that is the risk.

00:04:32: But, you know, looking at the synthesis of all these sources, there is a lot of caution baked in.

00:04:38: Ben Snyder projects, what, a twelve percent return for the S&P five hundred,

00:04:42: which is healthy.

00:04:43: It's healthy.

00:04:43: But he specifically notes that speculative trading is way below past peaks.

00:04:48: So it's a rally, but it's not a bubble.

00:04:50: People aren't buying mean stocks.

00:04:51: They're buying actual earnings.

00:04:53: That's the hope.

00:04:53: And Dr.

00:04:54: Andreas Voff put it really well.

00:04:55: He argues this reset is really about mature.

00:04:58: The market's shifting away from fireworks, you know, aggressive structuring, quick flips.

00:05:03: Oh, the

00:05:04: financial engineering.

00:05:05: Right.

00:05:05: And it's moving toward robust governance.

00:05:07: It's less flashy, maybe, but it's way more sustainable.

00:05:10: Which is the perfect transition to our second theme.

00:05:13: Because if the fireworks of financial engineering are gone, if you can't just slap debt on a company and hope for the best.

00:05:20: You actually have to fix the business.

00:05:21: Exactly.

00:05:22: Operational excellence is suddenly the only game in town.

00:05:25: And the math completely confirms that.

00:05:27: Martin Hecker shared a statistic that really grounds this whole discussion.

00:05:31: Since two thousand ten, forty-seven percent of PE value creation has come from operational improvement.

00:05:37: Forty-seven percent?

00:05:38: That

00:05:39: is way up from previous decades.

00:05:41: And meanwhile, the leverage component, the old debt arbitrage play, has dropped to just twenty-five percent.

00:05:47: That's

00:05:47: a complete flip of the traditional PE model.

00:05:50: Used to be buy, lever, sell.

00:05:52: Now it's buy, fix, build, then sell.

00:05:54: Precisely.

00:05:55: And Sam Silverman gave this fascinating breakdown of what that looks like in practice.

00:05:59: He calls it manufactured value.

00:06:01: And he uses the Blackstone Hilton Playbook as the gold standard.

00:06:05: A Hilton deal is legendary, of course.

00:06:07: But Silverman's whole point was that you don't need to be Hilton to do this.

00:06:11: No, not at all.

00:06:12: You can run that exact same play on a paving company.

00:06:16: or an accounting firm.

00:06:17: You buy a small, inefficient business.

00:06:19: You put in a professional ERP system.

00:06:22: You centralize procurement.

00:06:24: So you're buying Asphalt or software at a twenty percent discount because of scale.

00:06:28: You professionalize the sales team and suddenly that little paving company isn't trading at four times EBITDA anymore.

00:06:35: It's part of a platform that's trading at ten times.

00:06:38: That's the manufactured value.

00:06:40: It's the arbitrage between the bi-multiple and the cell-multiple created purely through operations.

00:06:45: And this is a big.

00:06:46: but just saying you're going to do it doesn't mean it happens.

00:06:49: Right.

00:06:49: Everyone says they add value.

00:06:51: Lee McCabe had this.

00:06:53: this stinging quote on this.

00:06:54: He said, a lot of firms are buying the job title and forgetting the operating system.

00:06:59: I loved that post.

00:07:00: He's saying firms hire a head of value creation, pay them a nice salary and just think the job is done.

00:07:05: And it's not

00:07:06: not even close.

00:07:07: If that person doesn't have a system, a weekly rhythm, a scorecard, actual authority, McCabe says it's just polite head nodding in board meetings,

00:07:16: polite head nodding.

00:07:17: I think we've all sat in those meetings.

00:07:18: How do you avoid that?

00:07:20: Ahmad Shahini offered a philosophy I really liked.

00:07:23: Nose in, hands off.

00:07:25: This is a great mental model for investors.

00:07:27: Nose in means you have to know the top three bottlenecks in the business.

00:07:31: You can't be ignorant.

00:07:33: So if the supply chain is breaking, you need to know.

00:07:35: But hands off means you let the CEO drive the bus, you clear the wreckage, you provide lease sources, but you do not grab the steering wheel.

00:07:43: But then there's a debate in the sources about Who helps the CEO?

00:07:47: Is it generalists or specialists?

00:07:49: Richard Majewick argues it really depends on your portfolio.

00:07:52: If it's homogeneous, say you own ten software companies, you need specialists.

00:07:57: You need a pricing guru or a soft sales expert because the problems are basically identical across all ten.

00:08:03: But if your portfolio is heterogeneous, a mix of retail, manufacturing, tech specialists just won't work.

00:08:10: So in that case, what do you need?

00:08:11: In that case, Madrick says you need generalists, people who can drop in, diagnose that the inventory management is broken, and then go hire the right consultant to fix it.

00:08:20: And Romain Begramian threw a bit of a curveball into this whole debate.

00:08:25: He pointed out that sometimes outsiders, like consultants, are actually better than industry veterans.

00:08:30: It's the curiosity versus experience argument.

00:08:34: An industry veteran might look at a problem and say, well, this is how we've always done it in the chemical industry.

00:08:38: Whereas an outsider just looks at the data and asks,

00:08:41: Why?

00:08:41: Exactly.

00:08:42: Bagramian argues that humility often outperforms experience when you're trying to actually transform a business.

00:08:49: But whether you use a generalist, a specialist, or a consultant, you still need someone at the company to execute.

00:08:56: Which brings us to what I think is maybe the most alarming theme of the week.

00:09:01: The war for talent.

00:09:02: It sounds dramatic, but the data is just brutal.

00:09:05: Maxwell Salazar reads a massive red flag.

00:09:08: He's seeing experienced CXOs, the people who've successfully run PE-backed companies before.

00:09:14: They're opting out of the market.

00:09:15: They're quitting the game.

00:09:16: They're just declining the rolls.

00:09:18: What?

00:09:18: Think about it.

00:09:19: Hold periods are getting longer, sometimes seven years.

00:09:22: The pressure is immense.

00:09:24: Salazar says these operators are looking at the deal and just saying, the PE juice isn't worth the squeeze.

00:09:29: Wow, that is a serious problem.

00:09:32: The whole PE model relies on taking A players and putting them into these companies.

00:09:37: If the A players go on strike... the model breaks.

00:09:39: And it gets worse.

00:09:41: Jack Seierd provided a really grim stat.

00:09:44: Over seventy percent of CEOs in PE-backed businesses are replaced during the whole period.

00:09:49: Seventy percent.

00:09:50: That means if you take a CEO job in private equity, you are statistically more likely to be fired than to see it through to the exit.

00:09:57: Yes.

00:09:57: And Seierd's point is that it's usually not a sudden explosion.

00:10:00: It's a slow drift.

00:10:01: The board has one expectation, the CEO has another, and they just drift apart until the bond breaks.

00:10:06: It's a failure of alignment.

00:10:07: So, if I'm listening to this and I'm an executive, maybe a CFO, how do I survive that seventy percent churn rate?

00:10:14: Yeah.

00:10:14: Catherine Wilcox listed the competencies for a PECFO and it's a terrifyingly high bar.

00:10:20: It really is.

00:10:21: She says you have to speak ____.

00:10:25: It's not enough to just be a good accountant anymore.

00:10:27: You have to handle supply chain conversations, manage investor dynamics,

00:10:32: be the co-pilot to the CEO.

00:10:33: Essentially.

00:10:34: And Scott Engler took it even a step further.

00:10:36: He says the CFO has moved to enterprise leadership, because if the CEO is getting fired, seventy percent of the time.

00:10:44: The CFO is often the stabilizer, the one holding the ship together during that transition.

00:10:49: which puts incredible pressure on that role.

00:10:51: And Paul Press notes that a lot of this pain could just be avoided if the alignment started earlier.

00:10:57: He points out that the hundred-day plan...

00:10:59: Critical first three months.

00:11:00: Right.

00:11:01: It so often fails because the operations team wasn't even in the room during due diligence.

00:11:05: So they inherit the deal after the check has already been written.

00:11:08: Exactly.

00:11:09: The deal team writes this thesis, will grow twenty percent by expanding into Asia.

00:11:15: Then the ops team comes in on day one and realizes, Ah, we don't have a product that works in Asia.

00:11:20: So they have to pressure test the thesis before the deal closes.

00:11:23: Or you spend the first six months just figuring out the plan is impossible.

00:11:27: Okay, let's shift gears from the people to the plumbing.

00:11:30: We talked about capital, but the structure of that capital is changing so fast, private credit is absolutely eating

00:11:38: the world.

00:11:39: It's the story of the decade.

00:11:41: Nicola Evmeyer points out that for giants like Apollo and Blackstone, their credit business has actually surpassed their equity business in scale.

00:11:50: Wait, hold on.

00:11:50: So the private equity giants are actually now private credit giants.

00:11:55: In terms of assets under management, yes.

00:11:57: Evmeyer lists the reasons.

00:11:59: Speed, regulatory arbitrage.

00:12:01: Banks have pulled back because of capital requirements.

00:12:04: Private credit funds just don't have those same restrictions.

00:12:06: They stepped into the vacuum.

00:12:07: And firms like Apollo are using insurance balance sheets and newity money to fund it all.

00:12:12: It's a permanent capital base.

00:12:14: And Andrea Cranelli-Dompey notes there's an evolution there too.

00:12:17: Private credit used to be so simple you lend money you get paid back.

00:12:21: And now it's getting complex.

00:12:22: He highlights the rise of continuation vehicles or CDs in the credit space.

00:12:27: We should probably unpack that term continuation vehicle.

00:12:30: Sure.

00:12:31: Traditionally, a fund has a lifespan say... Ten years.

00:12:35: At the end, you have to sell everything.

00:12:37: But what if you have a great loan or a great asset that just needs more time?

00:12:41: You don't want to sell it.

00:12:42: So

00:12:42: you create a new fund, a continuation vehicle, and you sell the asset from your old fund to your new fund.

00:12:49: So you're basically buying it from yourself to reset the clock.

00:12:52: Essentially, it lets you hold assets longer.

00:12:55: And Dompe's point is that credit funds are now using these actively.

00:12:58: It means credit is becoming much more like private equity, active management, long hold periods.

00:13:04: Which brings us right to liquidity.

00:13:07: If everyone is holding assets for ten years or moving them into CVs, how do the original investors get their cash out?

00:13:13: Okay, Chaohan calls secondaries a structural

00:13:16: reset.

00:13:17: Yeah, secondaries are the solution to that liquidity trap.

00:13:20: The secondary market is where you buy and sell existing interests in private equity funds.

00:13:24: Chaohan says this isn't just a trend, it's a permanent part of the ecosystem now.

00:13:28: Because the limited partners, the pension funds, they can't wait ten years for their money back.

00:13:33: They

00:13:33: need a release valve.

00:13:34: This is it.

00:13:35: But Jack Huckstable throws a bit of cold water on this whole liquidity party.

00:13:39: We hear a lot about democratization, you know, getting retail investors into these funds.

00:13:44: But Huckstable notes that over seventy percent of games in Evergreenfront since twenty twenty one remain unrealized.

00:13:51: That's the paper gains problem.

00:13:52: It's easy to say my portfolio is up twenty percent, but that value is based on a spreadsheet model, not a sale and

00:13:59: realizing those games, turning that paper wealth into actual cash in the bank.

00:14:05: That's the hard part.

00:14:06: And that's really the tension in twenty twenty six.

00:14:08: Can these funds actually distribute the cash?

00:14:11: It's a big question.

00:14:12: OK, let's close out with where all this capital is actually going.

00:14:15: We saw some fascinating sector spotlights this week.

00:14:18: Specifically, this collision of private equity, legal and AI.

00:14:22: This was one of the most interesting developments for me.

00:14:25: Ryan McKean flagged a major shift.

00:14:27: Private equity bought a large personal injury law firm.

00:14:29: A personal injury firm?

00:14:31: That seems messy.

00:14:32: It is, but McKean says they're running the exact same playbook they used on dentists and veterinarians.

00:14:38: Roll them up, standardize the back office, squeeze out every bit of efficiency.

00:14:43: He thinks the legal profession is at a huge inflection point.

00:14:46: And Jordan Furlong had a very cynical, but probably very accurate take on this related to AI and law.

00:14:54: He did.

00:14:54: He argued that traditional law firm partners, well, they hate AI and why?

00:14:59: Because their whole business model is the billable hour.

00:15:02: So efficiency literally costs them money.

00:15:04: Exactly.

00:15:05: If AI does a ten hour job in ten minutes, they just lost nine hours and fifty minutes of billing.

00:15:09: So they are incentivized to resist technology.

00:15:11: But a PE owner.

00:15:12: A PE owner doesn't care about the billable hour tradition.

00:15:16: They care about margin.

00:15:18: Furlong's point is, if PE takes over legal, they will force AI adoption to cut costs and boost profits.

00:15:25: It's the unstoppable force meeting the immovable object.

00:15:28: And in capitalism, PE usually wins.

00:15:31: Speaking of AI, Zorian Rotenberg quoted the anthropic CEO comparing AI to fifty million Nobel Prize winners.

00:15:37: He thinks it's going to commoditize financial modeling and due diligence.

00:15:40: And it probably will reduce the grunt work for junior analysts.

00:15:44: But, you know, we have to balance that high-level tech optimism with the on-the-ground reality.

00:15:51: Elizabeth C. made a crucial counterpoint about the manufacturing sector.

00:15:55: What

00:15:55: was her reality check?

00:15:56: She notes that while we have all these brilliant AI frameworks in manufacturing, execution is stalling.

00:16:04: There are five hundred and fifty thousand unfilled jobs in manufacturing right now.

00:16:09: Wow.

00:16:09: You can have the smartest AI strategy in the world, but you can't prompt engineer a factory floor.

00:16:15: You still need people to bolt things together.

00:16:17: Execution is lagging strategy.

00:16:19: That is a great reminder.

00:16:20: You can't just software your way out of every physical problem.

00:16:22: Yeah.

00:16:23: Okay, finally, a quick nod to PropTech.

00:16:25: Brad Hargreaves discussed a company called Proper.

00:16:28: This is a really smart niche play.

00:16:30: It's a PE roll-up of property managers, you know, the people who fix your sink and collect the rent.

00:16:36: Right.

00:16:36: But usually when you do a roll-up, you kill the local brand and slap a national logo

00:16:40: on it.

00:16:40: Which people hate because they trust their local person.

00:16:43: Exactly.

00:16:44: Proper keeps the local brands.

00:16:46: The tenant still calls Bob's property management.

00:16:50: But behind the scenes, proper centralizes all the accounting, the legal, the software, using AI.

00:16:57: It's a hybrid model.

00:16:58: So local face, centralized brain.

00:17:01: That's it.

00:17:02: It sounds just like that theme of operational excellence we started with.

00:17:05: It's not just about cutting costs.

00:17:07: It's using tech to scale what works while keeping the human touch where it really matters.

00:17:12: That really is the theme of the week.

00:17:14: If you look at the big picture from weeks four and five, the message is so consistent.

00:17:18: The easy money is gone.

00:17:20: The reset is here.

00:17:22: And success in twenty twenty six isn't about financial engineering.

00:17:25: It's about operational rigor, retaining that burnt out talent and navigating a much more complex capital structure.

00:17:31: And that seems like the perfect place to leave it.

00:17:33: If you enjoyed this episode, new episodes drop every two weeks.

00:17:36: Also check out our other editions on venture capital, M&A and strategy and consulting.

00:17:40: Thanks for listening.

00:17:41: Don't forget to subscribe.

00:17:43: See you next time.