Best of LinkedIn: Private Equity Insights CW 06/ 07

00:00:00: Provided by Thomas Allgaier and Frennus.

00:00:02: Based on the most relevant LinkedIn posts about private equity in CWs six-and seven, Frenness specializes in BDB market research for private equity teams to drive portfolio performance and value creation.

00:00:15: This edition is brought you our partners Informa and Private Equity Insights.

00:00:19: Don't miss out their upcoming conferences Super Return Secondaries Europe and Private Equity Insights Germany.

00:00:25: Find links of the Conferences in description.

00:00:27: Welcome back to the deep dive.

00:00:29: We've got a lot to get through.

00:00:30: today we're looking at calendar week six and seven of twenty-twenty-six And I have to say, The mood music has really changed.

00:00:38: it really has for the last.

00:00:39: what eighteen months?

00:00:40: The whole story has been survive.

00:00:42: until twenty five were just you know waiting For interest rates to drop.

00:00:45: It felt like everyone was just holding their breath.

00:00:47: Hmm but Looking at the sources this week specifically from John Messer and Nicola Ebbmeyer that waiting game And it seems to be officially over.

00:00:55: It does, the phrase that keeps coming in mind looking at all this is cautious momentum.

00:00:59: Cautious momentum.

00:01:00: I like that!

00:01:01: Its not the wild west of twenty-twenty one.

00:01:03: you know nobody's buying jpegs or rocks anymore but the paralysis has gone.

00:01:07: Ebbmeyer data says well its a smoking gun here.

00:01:10: private equity entry activity up eight percent year over years

00:01:14: and its not just small deals either.

00:01:16: thats what jumped out on me.

00:01:17: yeah The large entries were talking about deals over a billion euros.

00:01:21: They surged by forty-nine percent.

00:01:23: Forty

00:01:24: nine per

00:01:25: cent!

00:01:25: And it's a massive confidence signal, I mean when you see billion euro checks being written that tells you the big players are not sitting on their hands anymore?

00:01:33: It is recovery absolutely.

00:01:35: but and this really mission for our deep dive today we have to be careful We aren't going back to the easy money era.

00:01:45: The sources are painting a picture of very different landscape.

00:01:49: It's no longer about financial engineering, it is about what Maria Alvarez Mann calls operational alpha.

00:01:56: I really want spend some time on that because operational alpha sounds fantastic but actually executing it is brutal.

00:02:04: But before we get into how let us look at because there's this really strange deployment paradox happening right now.

00:02:11: It

00:02:11: is a paradox!

00:02:12: You have all these capital, but you just can't spend it the way used to.

00:02:15: Eric J. Pritchard highlighted this perfectly.

00:02:17: He points out that industry sitting on four-and-a half trillion dollars in dry powder.

00:02:23: That number is just staggering...It

00:02:26: IS.

00:02:26: Its hard even visualize that much money and theory with so much cash would be seeing buying frenzy.

00:02:33: But we aren't because the math has completely changed.

00:02:36: Pritchard's argument is that high interest rates and valuation uncertainty have just killed the old playbook,

00:02:42: so no more leverage in flip

00:02:44: exactly.

00:02:44: you can't Just buy a company slap A bunch of debt on it wait for The market multiples to rise And sell It.

00:02:49: That' s the financial engineering model and its basically dead.

00:02:52: if You Buy something today?

00:02:54: Your Paying a premium and your cost Of Debt Is Higher.

00:02:57: So your margin For error Is It's Effectively Zero.

00:03:01: So if you have trillions burning a hole in your pocket, but you can't just buy everything because the debt is too expensive.

00:03:08: You have to get incredibly picky!

00:03:10: You do?

00:03:10: And Anu Dranjan from Brookfield had a fascinating take on where that money is actually flowing.

00:03:17: He says The focus has shifted entirely To essential businesses

00:03:22: and assemble.

00:03:22: here's doing a lot of heavy lifting.

00:03:24: as a term right.

00:03:24: he's not Just talking about health care or groceries.

00:03:27: no it's deeper its infrastructure.

00:03:29: He mentions things like vehicle batteries thermal management systems for pipes, financial infrastructure.

00:03:36: The real plumbing of the

00:03:37: economy.".

00:03:37: That's

00:03:37: a perfect analogy to the plumbing—the whole thesis is durability!

00:03:41: If the stock market crashes tomorrow or if consumer spending drops you still need thermal management...you still need financial transaction processing.

00:03:48: Ranjan is arguing that in this high-cost capital world You have to prioritize downside protection over blue sky growth…You want assets that are hard tangible and necessary.

00:04:00: Boring is beautiful again, but it's a rigorous kind of boring.

00:04:03: I saw William Bee who was referencing Apollo and David Reuter both touching on this.

00:04:08: They used the phrase that stuck with me You can't just shake the tree anymore.

00:04:13: That's a great visual.

00:04:14: It's all about multiple expansion, right?

00:04:16: In the past you could buy company at ten X EBITDA and sell it at twelve x Just because the market got hotter.

00:04:22: that shaking The Tree was basically free returns.

00:04:24: now Reuter is saying you have to underwrite operational risk

00:04:27: which means you have To validate the entire plan.

00:04:30: before you even think About wiring money

00:04:32: precisely you need to know line by Line where are the efficiency gains or coming from Before day one.

00:04:40: If you buy a company thinking, ah we'll figure out how to improve margins later... You've already lost.

00:04:44: You're

00:04:44: underwriting the execution of the plan not just the asset

00:04:47: Exactly!

00:04:48: Your'e underwriting that plan itself.

00:04:50: And this brings us right back to operational alpha Maria Alvarez.

00:04:53: man was really emphatic about it.

00:04:55: It's not about leverage.

00:04:56: Its bout integrating data technology and institutional knowledge.

00:05:02: But lets be real

00:05:03: I know where your going with this.

00:05:04: Integrating Data & Technology is something every firm claims to do.

00:05:09: It's the free square on The Buzzword Bingo Card!

00:05:11: Everyone claims it, but so few do well because they just overcomplicate everything.

00:05:16: and this where Dan Cremens comes in with what might be my favorite insight of the week...the one-page value creation plan.

00:05:24: I

00:05:24: love this post as such a direct attack on the consulting industrial complex that permeates private equity.

00:05:31: we've all seen those sixty slide strategy decks.

00:05:33: oh yeah They're beautiful, they have complex gaunt charts.

00:05:37: And nobody looks at them after the Keckhoff meeting?

00:05:39: Never!

00:05:39: Kremens argues that complexity is actually the enemy of execution.

00:05:43: In PE there's this tendency to want-to look smart To big brain.

00:05:47: The problem.

00:05:48: But if you are a portfolio company CEO You don't need a sixty page deck.

00:05:52: You just need clarity.

00:05:54: His

00:05:54: litmus test Is brilliant.

00:05:56: Yeah He basically asks Can you swivel in your chair right now and hand me your value creation plan?

00:06:01: If you had to say, hang on.

00:06:02: Let me dig into the SharePoint folder and find version three point two then you don't have a plan.

00:06:07: You have a document not a plan.

00:06:09: That's a crucial distinction.

00:06:11: And the plan needs to answer one simple question How do we turn one dollar of investor money into three dollars.

00:06:18: if that story isn't crystal clear On a single sheet of paper you just aren't gonna get alignment

00:06:24: And alignment is the magic word.

00:06:26: You can have the best plan in the world, but if people running a company cannot execute it, its completely worthless.

00:06:32: Which Is The People?

00:06:33: Component Of Operational Alpha Jason Crane made very strong statement Private equity doesn't lose on strategy It Loses On Talent

00:06:41: and the stats back them up.

00:06:43: And honestly, they're shocking!

00:06:44: Greg Heads shared that nearly seventy percent of CEOs, CFOs —the whole C-suite in PE backed companies— are replaced during a hold period.

00:06:53: To seventy

00:06:54: percent?

00:06:55: That is an enormous amount of churned...

00:06:56: It's a revolving door…and Greg Head points out about sixty per cent of those changes happen in year one –that tells you something very specific.

00:07:03: Not that it suddenly became incompetent

00:07:05: No It's that they were the wrong fit for the investment thesis from day one.

00:07:10: Scott Angler calls this misalignment, it feels like a failure of due diligence on the human side of the

00:07:15: equation.".

00:07:16: It absolutely is!

00:07:18: Angler and Head both argue that firms need to define their roles so much more sharply.

00:07:23: Do you need a wartime CEO who can cut costs and stabilize a sinking ship?

00:07:29: Or do you need growth CEOs who find product market fit or scale sales

00:07:33: teams And usually those are two very different people.

00:07:36: Almost

00:07:36: always, and if you put a growth CEO in turn around situation they will fail not because aren't smart but their toolkit is completely wrong for the job.

00:07:45: And replacing a CEO costs you months of momentum, which in five-year hold period he just can't afford.

00:07:52: So operational alpha is just as much about HR and psychology as it is about spreadsheets?

00:07:56: Definitely.

00:07:57: But okay we can talk these weeks without addressing the elephant on the room.

00:08:00: technology AND AI.

00:08:03: This wasn't usual AI's magical hype.

00:08:05: There was some real doom and gloom here especially around private credit

00:08:09: this one that most complex but important insights.

00:08:12: Eric Bollender's private capital compass highlighted a major sell-off in private credit stocks and the driver, fear of AI disruption.

00:08:20: Okay let's unpack that because it is bit of domino effect.

00:08:23: Why does say ChatGPT threaten a private credit fund?

00:08:29: So think about what?

00:08:30: backing those loans?

00:08:32: In the last few years, private credit loaned billions to fund buyouts of software companies—sauce businesses specifically.

00:08:39: And those deals were done at peak valuations in twenty-twenty one and twenty-two?

00:08:43: At

00:08:43: a very peak!

00:08:44: The collateral for the loan is recurring revenue from that software company.

00:08:48: Okay so I lend money basic copywriting tools embedding on their subscription revenue to pay me back.

00:08:57: Exactly, but now enter AI tools like Claude Code or these advanced LLMs.

00:09:02: These tools threaten the very business model of those legacy software companies.

00:09:07: if an AI can write code for free Or very cheap that you used to pay a SAW subscription For and

00:09:12: then that company's revenue is at massive risk

00:09:14: And If The Revenue Drives Up they default on the loan.

00:09:17: Wow!

00:09:17: So, The private credit investors are looking at their portfolios and asking how many of our loans are backed by software companies that about to be made obsolete?

00:09:25: It's a huge unpriced risk

00:09:27: That is terrifying if you're holding that paper.

00:09:30: Stuart Fatheringham noted something like fifty-seven percent of PE execs say AI maturity is now critical for an exit.

00:09:38: it is

00:09:38: basically yeah can't sell a company If You Can't Prove Its AI Proof.

00:09:42: but And this Is Disconnect AI Ranks Last in actual execution within their portfolios.

00:09:48: It's a huge gap, everyone knows they need an AI strategy to sell the asset but almost nobody has figured out how to actually implant it.

00:09:55: yet its erase against time trying to retrofit AI onto companies that weren't built for it.

00:10:00: But is not all scary news?

00:10:01: there are tools being billed.

00:10:05: Alex Baggetchi from Film and Sifter talked about the deal engine.

00:10:08: Right, this is the flip side using tech to run the PE firm itself better.

00:10:12: Badgedechi talks about UI fatigue.

00:10:14: investment professionals are these highly paid really smart people?

00:10:18: but they spend half their lives manually updating CRMs in wrestling with spreadsheets

00:10:23: The classic analyst burnout problem?

00:10:25: That's it!

00:10:26: And Baggetti argues firms need a Deal Engine To automate that grunt work...the data should work for team not other way around.

00:10:33: If you want to find those essential businesses we were just talking about, You can't be drowning in data entry.

00:10:38: Speaking of data Jason Spencer pointed out a shift In how the public markets are viewing AI specifically with Microsoft.

00:10:45: This feels like healthy correction.

00:10:47: The market has moved from what he calls narrative led optimism

00:10:51: Just believing the hype.

00:10:52: Believing

00:10:53: the hype exactly to rigorous scrutiny.

00:10:56: Investors are now asking the hard questions, where is the cash flow?

00:10:59: What's the capital intensity?

00:11:01: It's not enough to say we have AI.

00:11:03: you have to show how it actually makes money

00:11:06: which brings us back full circle to discipline Discipline and entry in operations And finally discipline in getting the money out.

00:11:14: Let's talk about exits.

00:11:15: The exit environment is the real bottleneck right now.

00:11:18: We said entries are up eight percent, but exits are still lagging.

00:11:21: that log jam hasn't fully cleared yet

00:11:23: But there's some cracks of light.

00:11:24: Neil Fatania highlighted a couple massive wins.

00:11:27: they give them hope.

00:11:28: Yes!

00:11:28: The Medline IPO was huge.

00:11:30: A fifty-five billion dollar valuation and Verisure at sixteen billion dollars.

00:11:35: These are signals that the IPO window is cracking open but only for the absolute highest quality assets.

00:11:42: That's The Catch, isn't it?

00:11:43: For every med line there are a dozen companies stuck in limbo and Nishat Jones had great breakdown of why these exits stall.

00:11:50: And it comes back to data.

00:11:51: Again, Jones argues that exits stall because of a lack of a data-led strategy.

00:11:57: when the buyer comes in to do due diligence they want proof.

00:12:00: Hard numbers hard numbers.

00:12:01: if your customer data is fragmented or you can't prove brand loyalty with things like net revenue retention The buyer just loses confidence.

00:12:08: and in dealmaking When confidence drops evaluation crashes where the whole deal Just dies on the vine.

00:12:14: exactly.

00:12:14: You can't bluff your way through an exit anymore.

00:12:16: I

00:12:17: really liked Adam Coffey's take On the mindset of an exit says founders often think of it as the finish line.

00:12:22: Like I sold a company to PE, and I'm done where's my check?

00:12:25: And

00:12:25: Coffey says no its at checkpoint

00:12:27: At Checkpoint.

00:12:28: that changes whole dynamic.

00:12:29: It does!

00:12:30: If you want sell private equity You have.

00:12:32: build a sellable asset not just job do yourself.

00:12:35: The PE firm usually wants stay on grow into next checkpoint.

00:12:40: They are buying jockey.

00:12:41: much is horse

00:12:42: Which leads perfectly in rollover equity.

00:12:45: Caledazar calls second bite apple.

00:12:48: This is such a powerful wealth creation tool.

00:12:51: Let's say you sell your business for fifty million dollars, You might take forty million in cash but keep ten million dollars.

00:12:58: so twenty percent invested In the company alongside The PE firm.

00:13:01: and

00:13:01: the whole logic Is?

00:13:02: The PE Firm is there to supercharge that Company?

00:13:05: right

00:13:06: if the PE firm does its job You know adds That operational alpha buys some competitors.

00:13:12: ten million dollar stake might be worth thirty or forty million dollars five years later.

00:13:17: That second bite can end up being worth more than the first.

00:13:20: but what if you can't sell?

00:13:22: What if the IPO window just isn't open for you?

00:13:24: we're seeing new structures emerge.

00:13:26: Vivian Gonzalez talked about continuation funds, continuation

00:13:29: funds have had a bit of a rebrand.

00:13:31: they used to be seen as a failure like a plan B because you couldn't sell the asset.

00:13:35: right now Gonzales argues that are becoming a core strategy.

00:13:39: it allows the PE firm to hold onto a real winner for longer.

00:13:44: So how does that work?

00:13:45: Say you have a great asset, but the fund's life is ending—you just move it into a continuation fund.

00:13:51: The LPs who want liquidity can cash out But the GP keeps.

00:13:55: the assets grow even further.

00:13:57: It's a win-win.

00:13:58: And on the other end of the time horizon spectrum, Ronald Diamond made a really interesting comparison between PE and family offices.

00:14:05: This is so significant for founders when they're choosing a partner.

00:14:09: private equity is structurally designed to sell every three to five years.

00:14:12: that creates transaction costs and what Rob Worth calls strategic distraction.

00:14:17: you're constantly polishing the company For The Next Sale whereas

00:14:20: A Family Office

00:14:21: They can hold forever.

00:14:23: diamond notes That Family Offices Avoid That Churn?

00:14:25: They Can Focus On Long Term Compounding without the artificial pressure of a fun cycle.

00:14:30: If you care about legacy and not just speed, that's becoming really attractive alternative.

00:14:35: Let's zoom in geographically for a minute.

00:14:36: we mentioned the Dach region.

00:14:38: Germany Austria Switzerland was bit slow on entries but there is definitely active either.

00:14:44: Oh yeah Andres Klab and Sebastian Esser both highlighted buy-and-build activity In the DSCH mid market.

00:14:52: it very active.

00:14:53: The Odewald example

00:14:55: Right, the high office group.

00:14:56: They aren't just buying one company they're buying a platform in social recruiting and then immediately snapping up add-ons like Fatch Digital...they are moving really fast!

00:15:06: That strategy of aggregating fragmented markets is still the dominant play.

00:15:18: Well, it makes sense if you reframe it.

00:15:20: He cites an article suggesting events aren't just cyclical one-offs anymore.

00:15:23: they're scalable platform ecosystems.

00:15:26: That sounds like peak buzzword bingo But I think i get it.

00:15:30: If you have a trade show You also have all the data on the buyers and sellers

00:15:34: Exactly.

00:15:35: And if you can build a community that meets in person once a year but engages digitally All year round?

00:15:40: That's a very different business model.

00:15:42: It creates recurring revenue!

00:15:46: it is recurring revenue.

00:15:48: So we've covered the return of momentum, the absolute necessity of operational alpha this scary reality of AI risk and the changing exit landscape.

00:15:57: It's

00:15:57: a lot to digest!

00:15:59: But I want leave our listeners with one final slightly provocative thought from Maxwell Salazar.

00:16:04: We spend so much time talking about the mega funds, the Apollo's.

00:16:08: The Blackstones and KKRs.

00:16:11: They had all of their headlines but numbers are just huge.

00:16:13: But Salazar points out that middle market is where real hustle is.

00:16:16: he shared a stat.

00:16:18: Middle Market buyout investments delivered seventy seven percent median EBITDA growth.

00:16:23: Large cap only sixty three percent.

00:16:25: That is a significant gap, that fourteen percent difference Is where the real value creation

00:16:30: lives.

00:16:31: It is!

00:16:31: So The question for you listening are You chasing the logo or Are you chasing performance?

00:16:35: Because the real operational alpha might be happening in A conference room with five people Not In a skyscraper With five hundred.

00:16:42: That's great to chew on.

00:16:44: If you enjoyed this episode New episodes drop every two weeks.

00:16:47: Also check out our other editions On venture capital M&A and strategy And consulting.

00:16:52: Thanks For Listening.

00:16:53: Don't forget To Subscribe.