Best of LinkedIn: Private Equity Insights CW 08/ 09

00:00:00: Provided by Thomas Allgaier and Freyness, based on the most relevant LinkedIn posts about private equity in CW eight-and nine.

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

00:00:14: This edition is brought you buy our partners Informa and Private Equity Insights.

00:00:18: Don't miss out their upcoming conferences Super Return Secondaries Europe & Private Equity insights Germany.

00:00:24: Find links of the Conferences in description

00:00:27: Will said And it's great to be back looking at the actual data again.

00:00:31: Yeah, definitely welcome everyone to a new deep dive where we're taking a hard look at the private equity landscape today and To figure out what's actually happening behind closed doors.

00:00:41: We're looking at The conversations professionals are having with their peers

00:00:44: right because our mission Today is really about cutting through the noise.

00:00:48: We want to bring you the top Private Equity trends an actionable insights curated directly across LinkedIn from calendar weeks eight and nine And we're going to keep the focus incredibly sharp today.

00:01:00: We have centered all these discussions around four key themes, were looking at market reset value creation leadership and talent.

00:01:08: And

00:01:11: just to set the tone for you listening right now, this is a no fluff straightforward conversation.

00:01:15: Yeah We know your time is valuable So this is tailored for professionals who just need to know what their peers are actually talking about on the ground.

00:01:23: No basic definitions.

00:01:24: today we're jumping right in Right.

00:01:27: so let's start with our first theme which Is The Market Reset and The Liquidity Crunch.

00:01:33: It's pretty much the elephant In the room right Now.

00:01:35: Oh

00:01:35: absolutely there is a massive fundamental shift happening across the industry and David Howe had an insight that I think perfectly frames this first cluster.

00:01:44: Yeah, i saw his post.

00:01:45: he noted that the current environment we're in isn't simply about you know timing of market bottom for a decade.

00:01:50: We have this massive tailwind of cheap capital and automatic multiple expansion

00:01:55: which was incredibly forgiving

00:01:57: exactly.

00:01:58: but horror points out That era has just gone.

00:02:01: We are in a complete reset where operational fundamentals matter exponentially more than financial leverage.

00:02:08: And the data backing up that psychological shift is just stark!

00:02:11: Tim Fetzer highlighted this quote from The Bain Global Private Equity Report, and the defining phrase he pulls out as...

00:02:19: Which is a terrifying phrase if you're underwriting your deal right now.

00:02:21: It really is.

00:02:31: You need closer to ten or twelve percent.

00:02:33: just make the exact same math work.

00:02:35: Just break even on old models and generating twelve-percent organic growth means you can't trim fat, you have actively capture market share or execute flawless add ons.

00:02:44: And this totally pivots conversation with what it mean for liquidity Because

00:02:48: of execution gap is so wide now?

00:02:50: Exactly Neha Chiraria pointed out that because firms are struggling hit these new targets we had a massive backlog of unsold assets.

00:02:58: This exit log jam is completely driving a boom in the secondary market.

00:03:02: Continuation vehicles are everywhere?

00:03:04: Yeah, they were becoming the norm rather than the exception.

00:03:06: you just roll the asset into a new fund to buy yourself more runway.

00:03:11: but Ian Charles whose insights we're shared by Adam Liccaro recently he issued really sobering warning about this.

00:03:17: oh The zombie GP projection.

00:03:19: yeah

00:03:20: charles projects that if this backlog continues We could see the rise of up to six hundred zombie GPs By the end of the decade.

00:03:26: six

00:03:27: hundred

00:03:27: right just managing a trillion dollars in completely trapped NAV.

00:03:31: That

00:03:31: is a staggering amount of illiquid capital, just sitting there harvesting management fees

00:03:37: and looking at the broader systemic view of this entire leverage model.

00:03:41: Victor Hong brought up a perspective that we should neutrally report on here because it's gaining a lot of traction.

00:03:45: Yeah The regulatory debate

00:03:46: exactly.

00:03:48: Hong's argument explores how the traditional high leveraged short term exit model of PE Is facing intense scrutiny And the core of his argument is that model frequently externalizes risks onto third parties.

00:04:00: Like workers or local communities, right?

00:04:02: Especially in sensitive areas like health care and education where cutting costs to meet debt covenants impacts patients directly.

00:04:10: Hong notes this dynamic leading serious calls for targeted regulatory frameworks things like minimum quality standards.

00:04:20: It's a massive debate over social impact and regulation.

00:04:23: It is, And it perfectly segues into our second theme because if you can't rely on massive leverage and regulatory scrutiny as tightening around simple cost cutting how do actually hit that twelve percent growth target?

00:04:36: You have to execute which brings us value creation in the reality of execution.

00:04:41: Sergey Platnikov pointed this out beautifully.

00:04:44: With holding periods stretching out so far now, PE is being forced to lean heavily into true roll-up your sleeves operational value creation.

00:04:51: The spreadsheet isn't gonna save you anymore?

00:04:53: No it won't.

00:04:54: but the reality of how that execution happens is often pretty messy.

00:04:58: Lee McCabe posted this highly relatable honestly kind of funny reality check about how operating partners are utilized today.

00:05:06: I love this post.

00:05:07: the Dave and Karen examples.

00:05:08: Yes!

00:05:10: McCabe highlights firms will underwrite these massive procurement synergies.

00:05:15: But the reality is that procurement, as run by a guy named Dave who won't change suppliers because the current supplier sponsors his golf day.

00:05:23: it's painfully accurate

00:05:24: or The deal team expects sweeping process improvements but the processes controlled by Karen Who absolutely hates software and refuses to change anything.

00:05:34: And the operating partners are just stuck in the middle.

00:05:36: Exactly they get an impressive title budget or authority to actually force Dave, or Karen to change.

00:05:44: Which brings up such a critical insight from Wayne Marhelsky.

00:05:47: he reacted to this exact dynamic pointing out that the industry constantly models value creation as if a company's absorption capacity is infinite.

00:05:55: right

00:05:55: like they could just swallow A new ERP system and pricing overhaul in three months

00:05:59: exactly.

00:06:01: but marhelski argues That execution capacity not capital Is the actual binding constraint MPE today?

00:06:07: So how do firms bridge their gap?

00:06:09: Because the clock is ticking on these holes.

00:06:11: Well, Polk press proposed a really interesting structural solution.

00:06:15: He suggests intentionally rotating deal professionals into portfolio operations roles and vice versa.

00:06:20: Oh blurring the lines completely

00:06:22: right.

00:06:22: blurring The lines between deal teams an ops team so you can compress the gap between the close And they actual execution by months.

00:06:30: An ops guy in diligence Can spot of fake synergy immediately?

00:06:34: Yeah at a deal guy in Operations actually understands the core thesis They underwrote.

00:06:39: I like that.

00:06:40: But even with the right team, Jack Sire had highlighted a post by John Kelleherr That warns against what he calls value creation.

00:06:47: dreams just dressed up as plants.

00:06:49: The strategy

00:06:50: theater?

00:06:51: Exactly!

00:06:52: Kellehr's rule is simple If you can't articulate the thesis in one single sentence You cannot align to business behind it.

00:06:58: A forty-slide deck isn't gonna convince Dave To skip his golf day.

00:07:01: It absolutely will not.

00:07:03: And that human element Is the perfect transition to our third cluster Leadership talent and culture.

00:07:09: Because execution ultimately lives or dies with the C-suite.

00:07:12: Christopher Gameship Game had a brilliant post about this.

00:07:15: He pointed out that The real job of a PECFO doesn't happen in the spreadsheets before the deal.

00:07:21: No, it starts two weeks after the close Right.

00:07:24: It's exactly when the forecast breaks and the pristine integration plan completely falls apart upon contact with reality.

00:07:32: Yeah And if you're a candidate listening right now, Vivian Gonzalez had some incredible advice.

00:07:38: If you are interviewing for a C-suite role at a portco that evaluation must go both ways.

00:07:43: You can't just be grateful for the interview Right.

00:07:46: Sophisticated candidates need to evaluate the PE sponsors operating style and their life cycle Just as rigorously As the sponsor is evaluating them

00:07:54: Because how they behave when things inevitably miss the forecast in quarter two.

00:07:59: Exactly, and from the sponsor's perspective Scott Angler and Dave Thomas pointed out that When leadership fails it is rarely about capability

00:08:08: Right!

00:08:08: It's about timing.

00:08:09: Yes They argue that PE consistently loses on sequencing.

00:08:14: A CEO who thrives at building a company to eighty million dollars Is almost never wired for The rigid margin expansion needed To get into three hundred million.

00:08:23: Stagefit drives enterprise value far more than a glossy resume.

00:08:27: One

00:08:27: hundred percent.

00:08:28: And as you scale that business, You run into huge cultural risks.

00:08:33: Maxwell Salazar shared A really powerful quote from Charles Bracowski to illustrate this.

00:08:38: You can't spreadsheet your way into the culture of a business.

00:08:41: That is so true in The Middle Market!

00:08:43: It is, cutting headcount to drive margin expansion is easy on paper but you could easily kill unwritten systems and informal trust networks that actually make A middle market founder-led business work first place.

00:08:54: You strip out the culture and are left with a shell.

00:08:56: they cant grow organically which is exactly what it demands right now Exactly.

00:09:01: And this tension between growth efficiency and human capital brings us our final.

00:09:11: We really need to unpack the AI hype here.

00:09:14: Ben Gilbert approached this using Michael Porter's classic frameworks, and it is fascinating!

00:09:20: Gilbert argues that right now if everyone in your industry uses AI to cut costs by thirty percent you don't actually gain a competitive advantage...

00:09:29: Right?

00:09:29: You just lower the cost floor for every one The margins eventually compress back to normal.

00:09:33: Exactly He argues that true competitive advantage is whatever AI cannot replicate, which as human judgment applied to complex proprietary problems.

00:09:43: Neil Kumar builds on this beautifully with his framework of the first mile versus The Last Mile.

00:09:48: I really like this breakdown.

00:09:49: Yeah

00:09:50: so the First Mile is data capture classification basic synthesis A.I completely owns That.

00:09:55: but the last mile the actual human judgment and strategic action that belongs to us.

00:10:01: AI just changes where in the workflow, but

00:10:05: you have to be rigorous about how you implement it.

00:10:07: Eric Bonder issued a huge warning against what he calls AI theater.

00:10:10: Oh!

00:10:10: The vague innovation budgets.

00:10:12: Yes

00:10:13: Just spending money on AI To put it on a slide deck directly to EBITDA margin expansion.

00:10:24: If it doesn't move the needle on the cost base or revenue, its a distraction

00:10:28: and you can afford distractions especially when AI is threatening core asset classes.

00:10:34: Jason Spencer had sector specific warning about enterprise software.

00:10:38: that's just critical.

00:10:39: B-to-B sauce has been the darling of PE buyouts for decade.

00:10:42: It was perfect asset high switching costs recurring revenue massive margins.

00:10:47: But Spencer warns that generative AI represents an existential substitution risk to the entire model.

00:10:53: Because

00:10:53: it lowers cost of building custom software?

00:10:56: Exactly, why buy a massive SaaS license if an AIA agent can build a custom workflow for your team internally?

00:11:02: The switching costs moat just evaporates

00:11:04: Which means PE firms have to radically update their commercial diligence frameworks immediately.

00:11:09: You cant ask is it SaaS anymore?

00:11:12: you need to ask what remains scarce in an AI abundant world?

00:11:15: It fundamentally changes the risk profile and honestly it brings all these themes together.

00:11:19: It really does, which leaves you with a final somewhat provocative thought to mull over as you look at your own portfolios.

00:11:27: If AI is actively compressing the value of traditional software modes And we have all these zombie GPs stuck holding stagnant assets in a market demanding twelve percent organic growth Are we witnessing?

00:11:39: The extinction of the pure financial engineer?

00:11:42: that Is the million dollar question

00:11:44: right?

00:11:44: Will the next decade of private markets belong exclusively to a new breed of hybrid operator technologists who actually know how to build a business rather than just buy one?

00:11:54: Are we looking at the rebirth of The Modern Holding Company instead?

00:12:10: Thank you so much for joining us with this deep dive.

00:12:12: Stay sharp out there, keep adapting and don't forget to subscribe.

00:12:15: So your number is an update.

00:12:17: We'll catch on the next one.