Best of LinkedIn: Private Equity Insights CW 10/ 11

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

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

00:00:14: right?

00:00:14: And our mission today is really to unpack those top Private Equity trends that we've seen sweeping across LinkedIn over last two weeks.

00:00:20: exactly!

00:00:22: Imagine for a second that you're a ship captain, and for the last ten years You've had this massive powerful tailwind just pushing your ship forward.

00:00:32: You barely have to touch the sails right?

00:00:34: You were just breaking speed records.

00:00:36: left-and-right Yeah.

00:00:36: But then literally overnight The wind Just dies completely stops.

00:00:41: if you want to keep moving yeah To get down into the galley grab an oar And start rowing yeah, and That sudden just jarring shift from coasting to manual labor.

00:00:50: I mean, that is exactly what's happening in the world of private equity right now.

00:00:54: It really is and that vanished tailwind is exactly we are unpacking today.

00:00:59: Okay let's unpack this.

00:01:01: We have to start with overarching macroeconomic reality here because a fundamental shift in underlying deal math basically dictating every single other trend across market.

00:01:15: Well, one

00:01:16: hundred percent.

00:01:16: It really is the engine room of the whole industry and there's this phrase that has been going absolutely viral among professionals over the last two weeks who was shared heavily by folks like Evan Son and Janish Rathard right?

00:01:27: And it comes straight out of Bain & Company global PE report.

00:01:30: for twenty-twenty six The phrases simply twelve as a new five.

00:01:34: Twelve As A New Five.

00:01:35: Okay so what does actually look in practice to affirm buying company today?

00:01:41: Well, historically if a private equity firm bought of business achieving a five percent annual growth in EBITDA Which is you know essentially accompanies core operational profit before accounting tricks and taxes and all that

00:01:52: read the real cash Exactly.

00:01:54: Just five percent growth on that was usually enough to hit their target return.

00:01:58: You grow those core profits by five percent a year?

00:02:01: You hold onto the asset for five years And boom!

00:02:03: You walk away with it two-and-a-half times.

00:02:05: return on your investment Everyone goes home happy

00:02:08: right because the broader economic market Basically did all the heavy lifting for you

00:02:12: precisely, but today.

00:02:14: I mean The math is just universally less forgiving borrowing costs are significantly higher and exit multiples have completely flattened out.

00:02:24: So to achieve that exact same return profile today You don't need five percent growth anymore.

00:02:29: You need ten to twelve percent annual growth.

00:02:31: Wow And there is this incredible data point from McKinsey that Lee McCabe and Mohamed Shaheen highlighted recently, which really puts a hard number on the vanished tale when we were talking

00:02:40: about.

00:02:40: Yeah!

00:02:40: The multiple expansion data.

00:02:42: Exactly so between twenty ten in twenty-twenty two fifty nine percent of buyout returns came from leverage and multiple expansion.

00:02:51: Let's just clarify how it actually works for you listening.

00:02:54: Multiple Expansion means you by business four say eight times its profits.

00:02:59: Absolutely, I mean nothing to improve the actual operations of business.

00:03:04: Right zero operational changes.

00:03:05: But then you turn around and sell it five years later for twelve times its profits simply because overall market went up And debt was practically free.

00:03:13: Yeah You didn't make company better Just rode a wave of a zero interest rate environment.

00:03:18: Exactly.

00:03:19: but today that multiple expansion accounts for a mere eight percent returns.

00:03:24: It dropped from fifty-nine down to eight percent.

00:03:26: Spaggering!

00:03:27: The other ninety two percent has to come from actual revenue growth and margin improvements, so it really sounds like the industry is gone from sailing to rowing.

00:03:35: But but I have to push back here for a second because isn't this just a return to business fundamentals?

00:03:40: Like weren't the last ten years the actual anomaly?

00:03:43: what's fascinating here Is that you're entirely right...it is absolutely a Return To Fundamentals..but returning to fundamentals requires a completely different organizational skill set than what many of these investment firms have built over the last decade.

00:03:58: Yeah, they aren't built for it

00:03:59: right and Muhammad Shaheen used a brilliant framing For this.

00:04:01: he said we are shifting from the era of the architect to The Era Of The Gardener.

00:04:07: Oh, the architect versus the garter.

00:04:09: I like that!

00:04:09: Yeah it's great.

00:04:10: so The Architect right focuses purely on structure.

00:04:13: they focus on financial engineering Negotiating a super clever entry price optimizing the debt stack.

00:04:18: It's all done on spreadsheet very

00:04:20: clean Very analytical

00:04:21: exactly.

00:04:22: but the Gardner On the other hand focuses on organic growth.

00:04:26: They literally have to get their hands into the dirt weed out.

00:04:29: operational inefficiencies Physically prune the business and this shift makes hands-on operating partners an absolute survival requirement Right now

00:04:37: Because buyers aren't just trusting the math anymore.

00:04:40: No, not at all.

00:04:41: Buyers in today's market are no longer willing to pay for like projected hypothetical synergies on a PowerPoint deck.

00:04:50: they're demanding verified systemic proof that you have actually improved The underlying machinery of business.

00:04:57: and

00:04:57: because deep operational gardening You know, really getting into the dirt takes so much longer than just moving numbers around on a spreadsheet.

00:05:05: It is causing this massive ripple effect in how long these assets are actually being held.

00:05:09: Oh

00:05:09: yeah!

00:05:10: The holding periods are stretching way out.

00:05:12: Right, firms simply cannot sell right now.

00:05:15: Which leads us to our next big theme which is A Massive Liquidity Squeeze.

00:05:19: The average holding period for a company in a private equity portfolio is now stretching over six and half, sometimes even seven years.

00:05:25: Which creates the log jam of just epic proportions.

00:05:28: I mean to put scale on this Alexander Lupichov shared some really staggering data from recent Alliance report.

00:05:33: Okay Right Now there are roughly thirty two thousand unsold companies stuck in private equity portfolios globally.

00:05:39: We were talking about three point eight trillion dollars In unrealized assets.

00:05:43: Three Point Eight Trillion.

00:05:45: Wow Yeah, and because these assets aren't being sold the actual cash distributions flowing back to the limited partners you know.

00:05:53: The pension funds...the endowments who actually supply the capital in the first place.

00:05:58: those distributions are sitting at historic lows

00:06:01: right?

00:06:01: Because money is just trapped on paper.

00:06:03: yeah And people look this logjam.

00:06:05: they assume that M&A market it's frozen because broader economy sluggish.

00:06:10: but Hugh McArthur pointed out a really fascinating psychological trap.

00:06:15: He argues it's not actually a macro freeze, he calls it a valuation standoff.

00:06:19: A valuation stand off?

00:06:21: Yeah that perfectly describes it

00:06:22: Right!

00:06:22: It is a pure stand-off between buyers and sellers.

00:06:25: the sellers are anchored to their old marks.

00:06:27: you know.

00:06:27: they remember what their company was supposedly valued at during the peak of twenty twenty one And they flat out refused to sell for penny less because to them it feels like taking a loss

00:06:36: Even if market has changed entirely.

00:06:38: Exactly.

00:06:39: But the buyers, they're pricing in The New Reality.

00:06:42: that twelve is the new five reality with super expensive debt.

00:06:46: so neither side blinks.

00:06:48: you don't have a market With No Buyers necessarily.

00:06:51: You Have A Market With No Agreement On Price.

00:06:53: Which Brings Us Directly To Arguably The Hotest Topic At The Recent Superturn Secondaries Europe Conference.

00:07:00: Because if you can't sell a portfolio company outright to a strategic buyer Right, but your investors are screaming for their cash back.

00:07:08: What do you do?

00:07:08: You turn to the secondaries market

00:07:10: exactly.

00:07:11: Specifically we were seeing this absolute explosion in continuation vehicles or CVs.

00:07:17: Vivian Gonzalez and Yilin X both noted how rapidly these are scaling right now.

00:07:22: And what's wild is they aren't just being used to hide distressed or underperforming assets anymore Which use to be the stereotype

00:07:28: right.

00:07:28: it used to be like a junk drawer yeah.

00:07:30: But now, firms are using continuation vehicles to hold on their absolute best tier one trophy asset.

00:07:36: Because

00:07:36: they want keep riding in their winters?

00:07:38: Exactly!

00:07:38: If you have a great company but it needs say three more years of that gardening we talked about...to hit its peak value.

00:07:45: They don't wanna sell it cheaply today just for fun deadline.

00:07:48: A continuation vehicle allows the firm roll this specific asset into brand new fund.

00:07:53: So it gives the original investors who want out a chance to finally take their cash while allowing new investors.

00:08:09: Aren't you just kicking the can down the road?

00:08:11: Like, is this real liquidity or it's a shell game designed to inflate fee revenue for GPs.

00:08:17: This raises an important question and its honestly one industry that is debating really heavily right now.

00:08:21: The short answer is It is maturing into legitimate portfolio management tool But requires incredible transparency To avoid being exactly what you said A Shell Game.

00:08:31: Right!

00:08:32: It has to be priced fairly

00:08:33: Exactly And Jonathan Broad highlighted this shift beautifully.

00:08:37: We are seeing both GP-led secondaries where the fund manager initiates the vehicle and a massive rise in LP led secondaries, were the investors themselves are actively trading their stakes on secondary markets to rebalance their own portfolios without waiting for

00:08:57: Actual functional plumbing for the industry.

00:08:59: It's not just an emergency pressure valve anymore.

00:09:02: Yeah, exactly The LPs are demanding DPI distributions to pay it in capital.

00:09:06: They want actual cash and their bank accounts Not just paper gains.

00:09:10: on a quarterly PDF report.

00:09:12: The secondaries market is stepping into provide that cash Which gives the fund managers the extra time they desperately need To execute that really difficult new math.

00:09:20: Right but that time is useless if you don't have the right tools.

00:09:23: I mean, if you are forced to hold a company for seven years and you desperately need to force twelve percent annual growth without relying on multiple expansion.

00:09:31: How do you actually do it?

00:09:32: Because you can't just hire twice the staff to double your output.

00:09:35: that destroys your margins completely.

00:09:37: No!

00:09:37: You need entirely new levers.

00:09:40: And that is exactly where we're seeing artificial intelligence shift from being this futuristic buzzword into raw essential operational infrastructure.

00:09:51: Yes, and Mauricio Escobar made a really fascinating observation about this.

00:09:54: He noted that heavyweights like Blackstone in Hellman and Freedmen are currently exploring a joint venture with Anthropic.

00:10:01: Wow!

00:10:01: A joint venture.

00:10:02: Yeah, they aren't just buying you know off the shelf software subscriptions for their employees.

00:10:08: They are trying to operationalize AI across their entire portfolio of companies as a core controlled Deployment layer which

00:10:15: is huge.

00:10:17: it really signals that AI is no longer a speculative tech bet.

00:10:20: It is standard productivity infrastructure.

00:10:22: now yeah But in this key, the nuance of how it actually gets deployed really matters.

00:10:27: My Clark laid out this brilliant framework for evaluating these tech investments.

00:10:31: right now he asks one critical question.

00:10:34: during due diligence He looks at an AI product and ask is a thin wrapper or does that have real depth?

00:10:39: Okay Let's break down to the listener.

00:10:41: A Thin Rapper would be you.

00:10:42: What exactly?

00:10:43: A

00:10:43: ThIN Rapper Is when a company just slaps generic chat GPT interface onto their existing software And calls It An AI Product.

00:10:52: You know, maybe it helps you draft an email faster or it summarizes a PDF document.

00:10:57: Right nice to have but not a game changer

00:11:00: exactly.

00:11:01: and if that is all It does A well-funded competitor can replicate your entire business model in about six weeks.

00:11:08: That Is a thin wrapper.

00:11:10: Real depth, on the other hand is deep workflow orchestration.

00:11:13: Like actually changing how the business operates?

00:11:16: Yeah it means integrating the AI into the messy completely bespoke edge cases of a customer specific industry like predicting supply chain bottlenecks by analyzing thousands of you know unformatted email threads from global suppliers.

00:11:30: and Clark also points out that traditional tech debt which By the way, it used to be a massive due diligence concern when buying a company is almost obsolete now.

00:11:38: Right because if a company has bad outdated code and AI can just rewrite the entire code base over weekend...

00:11:44: Exactly!

00:11:45: If code could be generated instantly….

00:11:47: The code itself isn't your competitive moat anymore….The true mote is how deeply business understands its proprietary data & customers' actual pain points.

00:11:57: Here's where this gets really interesting though Because deploying AI Inside a legacy portfolio company, you know one of these businesses that's been around for decades is actually proving to be incredibly difficult.

00:12:09: David Mackie and Paul Press both highlighted.

00:12:12: A massive pitfall they are seeing in the market right now.

00:12:15: AI Is failing when it gets treated purely as an IT project?

00:12:19: Yes

00:12:20: all the classic mistake

00:12:21: Right.

00:12:22: The IT department get some budget They deploy new tool They put a fancy slide in the board deck about successful AI adoption and absolutely nothing changes in fundamental unit economics of business.

00:12:32: It's

00:12:32: just theater!

00:12:33: It really is, it like trying to run high speed bullet train on rusted misaligned nineteenth century train tracks The

00:12:39: A.I.,

00:12:41: but your portfolio company's messy siloed legacy data.

00:12:44: Those are the tracks.

00:12:45: If you drop the high-speed train onto bad tracks...it derails immediately.

00:12:49: So how do private equity firms actually get measurable value creation out of this without derailing the whole company?

00:12:56: Well, they have to stop treating it as an IT implementation and start treating is a commercial P&L driven initiative.

00:13:02: It has to be about redesigning how revenue is generated or retained from the ground up.

00:13:08: Carsten W pointed out how this exact dynamic is literally rewriting the playbook for management consulting inside private equity right now.

00:13:16: so we're moving from slideware to software

00:13:19: That maps perfectly onto what Karsten noted.

00:13:21: We're moving away from episodic consulting projects where, you know really expensive consultants come in spend three months diagnosing a problem and just leave a massive slide deck on your desk to execute.

00:13:31: Bid luck right?

00:13:32: Yeah exactly.

00:13:33: AI allows for continuous execution.

00:13:36: You replace manual, time-consuming diagnostic processes with what he calls an AI value backlog.

00:13:41: It provides always on insight dynamic pricing adjustments live demand sensing.

00:13:46: operating partners are evolving into digital operators who drive this transformation continuously from inside the business.

00:13:52: So if you're looking for absolute best environment to apply heavy operational lifting deploying AI restructuring operations aggressively growing revenue The data points heavily toward the European mid-market, right?

00:14:05: Oh absolutely.

00:14:06: The european mid market is proving to be incredibly resilient.

00:14:09: It's attracting a massive amount of sustained capital for exactly this kind of hands on approach.

00:14:14: Yeah and the recent private equity insights conference in frankfort Really shown a spotlight on this dynamic.

00:14:20: torsch barcoltz and yawn michael both shared takeaways focusing On the incredible opportunity sitting inside the german middle stand.

00:14:27: right now We are talking about the absolute backbone of the German economy, these highly specialized small and medium-sized enterprises.

00:14:35: And right now over five hundred thousand of these SMEs are facing unresolved succession issues.

00:14:40: Five hundred thousand?

00:14:41: That's huge!

00:14:42: In demographics they're forcing a massive transition.

00:14:45: The founders who built this incredibly profitable niche manufacturing or engineering firms Are hitting retirement age...and the next generation often just doesn't want to run the factory.

00:14:56: But these businesses are frequently still running on paper systems or deeply outdated legacy servers.

00:15:02: They need professionalization, they need digitization and a smooth transition of leadership.

00:15:07: It's essentially the perfect laboratory for that Gardner approach we discussed earlier.

00:15:11: Exactly!

00:15:11: The private equity firm steps in...they buy out their retiring founder ...they protect the legacy from business but introduce modern digital infrastructure required to actually scale it.

00:15:22: And its not just Germany either.

00:15:24: Christian Bryn shared some really eye-opening data regarding the Nordics.

00:15:28: In twenty twenty five, an astonishing eighty two percent of all Nordic private equity deals were add on acquisitions.

00:15:35: Eighty Two Percent?

00:15:36: That statistic just shows the absolute dominance in that region.

00:15:40: Oh yeah!

00:15:41: You buy a solid platform company and you systematically bolt onto smaller regional competitors to create massive scale on pricing power.

00:15:49: It's highly operational play And it is working incredibly well over there.

00:15:54: Okay, but I have to hit the brakes here for a second because with all this talk of AI infrastructure and data readiness.

00:16:00: And buy-and-build rollups aren't we completely ignoring?

00:16:04: The actual humans inside these companies like you can just bolt three rival companies together apply an AI algorithm To their supply chain and automatically expect twelve percent growth.

00:16:15: right if We connect us to the bigger picture You've just hit on the single biggest point of failure in private equity value creation.

00:16:23: It is the invisible variable that ruins the math every single time.

00:16:27: Yes, and Maxwell Salazar shared a stark warning on this exact point.

00:16:31: He noted that up to sixty percent of PE-backed company failures are linked directly to cultural misalignment or leadership

00:16:37: failure.

00:16:38: To eight percent?

00:16:38: Right, and he gave this great very visceral example to explain how quickly this happens.

00:16:43: So imagine a new private equity pointed CEO shows up to his very first town hall at a newly acquired industrial manufacturing business.

00:16:51: The workers on the floor in boots hard hats steel towed shoes.

00:16:55: right then you see EO walks onto the factory floor wearing a tailored suit and tie.

00:16:59: oh no Instantly, the message received by every single worker on that floor is I am not one of you and do NOT understand what you do.

00:17:07: Exactly!

00:17:08: The trust completely gone before CEO even opens his mouth.

00:17:12: or consider new executive team only communicates about EBITDA margins in cost cutting never once mentions actual customers product quality or history of company.

00:17:23: Culture isn't just HR fluff It is the operating system of human behavior.

00:17:29: And Vasu Rao published research showing that strategic leadership misalignment, which when the C-suite and workforce are operating on totally different cultural frequencies... ...that misalignment can quietly drain five to ten percent annual revenue… …and waste upto forty percent organizational productivity.

00:17:45: I mean think about baseline math we started this whole conversation with.

00:17:52: Twelve Is The New Five!

00:17:54: If you are bleeding, forty percent of your daily productivity because your leadership team is misaligned with the workforce or because the executives literally can't agree on a strategic direction.

00:18:06: Hitting a twelve-percent growth target is mathematically impossible.

00:18:09: Yep

00:18:10: it just doesn't

00:18:10: work.

00:18:11: You could have best anthropic AI integration in world and most aggressive buy & build thesis but if internal culture rejects new operating model The execution completely stalls.

00:18:23: The margin for error is gone.

00:18:24: Yeah, the firms that win in twenty-twenty six and beyond are the ones they can master the hard stuff you know retaining key talent aligning corporate culture genuinely improving operations and deeply understanding their data.

00:18:35: They literally have to be elite gardeners.

00:18:37: yeah But but before we wrap up there was one final entirely unexplored thread from our sources That I think you really need to keep a close eye on.

00:18:45: it's sort of the dirty secretive private credit.

00:18:47: Ah the shadow banking side of the ecosystem.

00:18:50: okay

00:18:50: right?

00:18:51: So over the last decade private credit just exploded into a two trillion dollar market.

00:18:57: These are the non-bank lenders providing.

00:18:59: The massive loans that fuel all these private equity buyouts We've been talking about.

00:19:02: right because of traditional banks backed off

00:19:04: exactly.

00:19:05: But as Ro Hall Co here pointed out Because interest rates surged and stayed high,the floating rate loans at these companies took out Are suddenly massively stressing their balance sheets.

00:19:16: Default rates in private credit are currently hitting nine percent, which is the highest on record.

00:19:21: Nine percent default rate?

00:19:23: That sounds like a massive systemic risk especially if The underlying companies can't hit those new growth targets to actually pay off the debt.

00:19:29: Well it gets worse.

00:19:30: here Is the real mechanical secret brought up by Mark Rubenstein.

00:19:34: Private credit was initially celebrated because its supposedly displaced traditional banks.

00:19:38: Right, it supposedly moved the risk out of the banking system.

00:19:41: But to juice their own returns these private credit funds actually borrow money heavily from traditional banks.

00:19:48: Wait really?

00:19:49: Let me make sure I understand the plumbing here.

00:19:52: A Private Credit Fund lends money to a private equity backed company at say twelve percent interest but To have enough capital to make that huge loan in the first place The credit fund borrowed money From a massive Traditional Bank At six percent

00:20:06: Exactly.

00:20:07: So the traditional bank is still holding the bag?

00:20:10: If those underlying portfolio companies start defaulting at a nine percent rate, The traditional banks are going to suddenly realize they're sitting on massive indirect risk.

00:20:19: Oh

00:20:19: wow!

00:20:20: And if the banks get nervous and pull back onto leverage that provide private credit funds... ...the flow of capital into entire private equity ecosystem could severely tighten.

00:20:29: overnight.

00:20:31: We spend all our time watching the valuation standoff in equity, but that the real shockwave they could capsize.

00:20:36: The whole ship might actually come from the credit side.

00:20:38: It is absolutely something to watch very closely.

00:20:41: That is a brilliant point To leave off on.

00:20:43: the engine room might be shifting From the architect to the gardener But if the water under the boat disappears because of the credit markets freeze everyone Is in trouble?

00:20:52: If you enjoyed this deep dive New editions drop every two weeks.

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