Best of LinkedIn: Private Equity Insights CW 12/ 13

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

00:00:07: Frenness supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.

00:00:14: You can find more info in description

00:00:16: And right off of bat we should probably set stage for you the listener.

00:00:20: Today's mission is unpacking absolute top private equity trends that we've seen across Linkedin over calendar weeks Exactly.

00:00:29: And just to sync up on expectations right upfront, this deep dive is strictly for professionals across M&A private equity, venture capital and consulting.

00:00:38: Yeah

00:00:39: we are definitely not gonna you know hold your hand through the basics of what a buyout is today.

00:00:43: The tone is smart natural And completely devoid of fluff.

00:00:47: Right because were taking really hard look at structural shifts that basically rocking the private capital ecosystem.

00:00:53: right now We're

00:00:53: going to be looking at actual mechanics for this transition.

00:00:55: So start with macro market reset Then explore resulting bottleneck at exit door

00:01:02: Which is huge issue Massive

00:01:04: And then we'll dig into how AI and data are actually functioning as value creation levers, and finally will examine the very real structural cracks showing up in private credit.

00:01:13: Sounds like a packed agenda.

00:01:15: so let's start at the macro level.

00:01:17: I mean The era of easy money is just.

00:01:19: it's over.

00:01:19: Oh totally over.

00:01:20: that hangover from the zero interest rate policy.

00:01:22: you know ZRRP Era Is basically setting the stage for every single operational an exit challenge We're going to discuss today

00:01:29: right?

00:01:30: In Maxwell cells our head of post recently that frame this Honestly, incredibly bluntly.

00:01:35: Yeah he really didn't pull any punches with that one.

00:01:37: yeah He pointed out that the industry spent the last fifteen years basically confusing leverage With strategy and like Mistaking basic cost-cutting for actual durable value creation.

00:01:49: And The numbers he brought to the table are just staggering they

00:01:52: Really?

00:01:52: Are

00:01:53: right now there are sixteen thousand companies stuck in private equity portfolios That have been held For four or more Years.

00:01:59: That is roughly fifty-two percent of all buyout backed inventory.

00:02:03: Wait,

00:02:03: fifty two percent?

00:02:04: Yeah We are talking about a trillion dollars of unsold assets.

00:02:10: just you know sitting on ballot sheets aging rapidly.

00:02:13: A

00:02:13: trillion dollars in ageing inventory that's.

00:02:17: So what does that actually mean for the operators on the ground?

00:02:20: Because, I mean hiding behind a cheap debt facility just isn't an option anymore.

00:02:24: It means fundamental math of this industry is completely broken down and needs to be rebuilt.

00:02:29: Wayne Marhelsky and Lee McKay both offered some brilliant synthesis on this recently.

00:02:34: Oh, looking at the Bain twenty-twenty six report

00:02:36: right exactly unpacking the mechanics behind that bane report.

00:02:39: so think about the basic PE equation.

00:02:42: you want a two point five x return an invested capital over say Standard five-year hold.

00:02:48: right.

00:02:48: a few years ago You could achieve that by growing the company's EBITDA By just five percent annually

00:02:53: because the debt was practically free and you knew The exit multiple is going to be higher than your entry multiple anyway.

00:02:58: You can just ride That macroeconomic wave.

00:03:00: precisely, you Could buy a company at ten X earnings grow it at a modest five percent And sell It at fifteen x earnings with like three percent debt.

00:03:09: but today right?

00:03:11: The cost of debt has doubled or tripled.

00:03:13: an extra multiples are compressing not expanding.

00:03:15: So the

00:03:16: math just doesn't work?

00:03:17: No, it doesn't.

00:03:18: To hit that exact same two point five X return today firms don't need five percent growth They need ten to twelve percent annual EBITDA growth.

00:03:27: as McCabe perfectly phrased It Twelve is The New Five.

00:03:30: Wow!

00:03:31: Twelve Is The New FIVE That Mathis Just Completely Unforgiving It

00:03:35: really is...

00:03:35: It makes me wonder if a lot of these general partners are performing what McCabe calls governance theater.

00:03:40: Oh

00:03:41: absolutely

00:03:41: You know The routine, they show up.

00:03:44: They nod thoughtfully at the quarterly board meetings.

00:03:47: maybe deploy an operating partner who suggests a few software cuts.

00:03:50: yeah

00:03:50: trim some sauce subscriptions

00:03:52: right and then they just secretly hope that central banks bail them out with rate cuts.

00:03:56: because relying on financial engineering in multiple expansion today is well.

00:04:01: it's like trying to ride an escalator that has completely lost power.

00:04:04: Like, you can still get to the top but YOU are going to have to physically climb every single step yourself.

00:04:09: That is a phenomenal way to look at it and aligns perfectly with what Kyle Killian & Dan Cremons arguing right now.

00:04:16: The multiple expansion escalators just broken It's

00:04:19: completely stalled.

00:04:20: Yeah, Killian notes that the easy money era wasn't just asked to leave...it was evicted!

00:04:25: The only way he reached the top floor NOW Is through what HE calls operational alpha

00:04:29: Which means TRUE operating leverage Right?

00:04:32: Not just um spreadsheet optimization.

00:04:35: Exactly, Cremans simplifies the mechanics beautifully.

00:04:38: he says there are fundamentally only five levers to pull for equity value.

00:04:43: okay you can grow revenue expand margins complete strategic M&A pay down debt or expand your exit.

00:04:49: multiple right.

00:04:50: if multiple expansion and cheap debt are off-the-table You're forced to rely on those first three.

00:04:56: you have to build a highly efficient operational system

00:04:58: but building that operational alpha takes time And that's time that GPs really don't have if they want to return capital to their limited partners.

00:05:05: They definitely don't.

00:05:07: and That pressure-to-return Capital is crashing headfirst into a frozen M&A market, which is really our second major theme.

00:05:15: I mean If twelve is the new five and portfolio companies aren't hitting those aggressive new targets?

00:05:20: They just can't be sold.

00:05:22: no The cap.

00:05:23: so we're looking at a massive bottleneck of the exit

00:05:25: door.

00:05:25: It is a severe log jam and the root cause of it is the breakdown in price transmission.

00:05:32: Guillaume de Bel Air had a fantastic post analyzing this exact mechanism,

00:05:36: what did he say?

00:05:37: He pointed out that private markets have spent.

00:05:44: When assets aren't marked to market daily like public stocks are, volatility looks artificially low.

00:05:49: Oh right because it's a mark-to model system.

00:05:52: valuations are incredibly easy To maintain on an internal firm spreadsheet when you know nothing is actually trading hands to prove You wrong.

00:05:58: exactly the problem.

00:06:00: but as he argues twenty trillion dollars of assets not being priced Daily doesn't actually make them safer.

00:06:05: It just makes the risk invisible.

00:06:07: and now that transactions have largely stalled those paper valuations Are incredibly fragile.

00:06:13: You cannot agree on what an asset is worth without a clearing price.

00:06:17: Right, and agreeing on a clearing-price requires actual buyers and sellers to transact which they aren't doing because the bid ask spread as too wide.

00:06:26: Sellers need to hit their return hurdles And buyers don't want to pay up with eight percent debt

00:06:31: Precisely.

00:06:31: But wait I've seen headlines recently claiming that exits are rebounding.

00:06:35: like how does set square with a frozen market?

00:06:37: Yeah

00:06:38: It's a total mirage created by the top end of the market.

00:06:41: Zakir Hussain shared a staggering statistic on this.

00:06:44: Total private equity exit values did jump to seven hundred and seventeen billion dollars recently.

00:06:49: Okay, that sounds pretty good

00:06:51: It does but before anyone pops the champagne you broke down the actual data.

00:06:54: Twenty percent of that entire figure came from just seven mega deals.

00:06:58: Oh jeez so it's complete bifurcation.

00:07:01: The top one percent assets are trading And rest is stuck in mud.

00:07:04: Yes!

00:07:09: Nicola Ebbmeyer backed this up with European data.

00:07:11: What are things looking like in Europe?

00:07:13: Well, she noted that the median whole time for an exit in Europe has crept up to five point.

00:07:17: seven years With a full third of all assets now being held for over seven years.

00:07:22: Seven years.

00:07:24: The pressure from LPs to distribute cash must be immense at that point.

00:07:27: Oh it is.

00:07:28: So if the traditional route-like selling to a strategic buyer or another PE firm Is blocked How are they clearing the pipes?

00:07:36: By engineering entirely new ways out.

00:07:39: Matan Feldman highlighted a massive structural shift happening at the major investment banks.

00:07:44: to address this Bank of America and JP Morgan, our literally building dedicated private capital M&A teams right now.

00:07:52: Wait just to deal with PE backlog.

00:07:54: Yes their mandate isn't traditional banking.

00:07:57: it's help PE firms design flexible highly customized solutions Just to monetize these stalled assets.

00:08:04: Jack Seyer touched on this too, noting a pivot toward what he calls multi-path exit readiness.

00:08:09: What does that actually look like in practice though?

00:08:11: It means you don't just prep company for straight sale anymore.

00:08:14: You build the business case to support secondary buyout maybe minority stake sale or continuation vehicle

00:08:20: Which is essentially a GP selling an asset from one of their older funds into A brand new fund.

00:08:27: they also manage

00:08:28: right.

00:08:28: Exactly.

00:08:29: it resets clock and asset but forces LPs to make a really hard choice like take a haircut on a cash out right now or roll their money over and lock it up for another five years.

00:08:41: And this brings up a great point from Joe Lilly, he posted a fantastic reality check on this pushing back on the whole concept of an exit in today's environment.

00:08:49: Oh yeah because they aren't clean exits anymore

00:08:52: Right!

00:08:52: The headline might read Founder exits for five hundred million, but modern exits are rarely clean cashouts.

00:08:59: They're highly structured recaps like imagine you're trying to sell your house okay?

00:09:03: You finally get an offer But the buyer insists on a few conditions.

00:09:06: Like you have to pay their mortgage For The next two years you agree To replace the roof out of Your own pocket if it leaks before twenty-twenty nine.

00:09:14: and If they decide they don't like the garage you Have to buy It back.

00:09:16: that sounds like A nightmare.

00:09:17: right On paper or you sold the House in reality Are still entirely on the hook.

00:09:23: doesn't disappear, it just changes shape.

00:09:25: Exactly!

00:09:26: The deals are loaded with rollover equity where the seller is forced to reinvest a huge chunk of their proceeds.

00:09:33: they have conditional earnouts that might completely miss because of macro factors outside operators control plus heavy indemnities.

00:09:40: you aren't really out

00:09:41: which exactly why GPs are desperate for new edge.

00:09:45: if can exit cleanly You have to hold an asset for seven years, you have find a way to manufacture that twelve percent organic growth.

00:09:52: And

00:09:52: then it brings us our third theme artificial intelligence.

00:09:56: but just be totally clear.

00:09:57: we are not talking about AI the way Silicon Valley pitches in like a flashy keynote.

00:10:03: We're talking grounded operational integration.

00:10:06: Yes, AI is rapidly establishing itself as the mandatory third pillar of value creation right alongside financial engineering and operational excellence.

00:10:14: But Craig Ive wrote a piece referencing Harvard Business Review data that serves as massive reality check here.

00:10:20: Oh!

00:10:20: What did he say?

00:10:21: He notes that AI alone —as standalone tool—is not going to magically drive your returns.

00:10:26: The performance gap between top quartile & medium PE firms Is currently sitting at fourteen percentage points.

00:10:31: That's huge spread

00:10:33: Right.

00:10:33: And in an era where every single firm has access to the exact same enterprise AI tools, The software itself cannot be the differentiator.

00:10:43: The differentiators is context you give it and hands put into them

00:10:46: Precisely!

00:10:48: The winners are pairing AI with genuinely experienced operators People who have actually run PNLs managed supply chains and navigated downturns because

00:10:57: AI compresses the timeline of execution, but The Experienced Operator compresses

00:11:25: Exactly.

00:11:25: OpenAI is actively pitching joint ventures to massive PE firms like TPG and Advent, OpenAI is offering them guaranteed seventeen point five percent of preserved returns with downside protection just to finance AI rollouts across hundreds at their portfolio companies.

00:11:44: Wait,

00:11:44: hold on.

00:11:45: a Silicon Valley AI lab is underwriting traditional private equity risk?

00:11:49: How does that math even pencil out?

00:11:51: why would openai take on the financial down side of a mid-market manufacturing company failing to implement an algorithm

00:11:58: Because OpenAI has realized that the bottleneck to their own valuation is no longer the intelligence of your language models.

00:12:04: The bottleneck is enterprise integration.

00:12:06: Ah,

00:12:06: getting them actually use it?

00:12:08: Yes!

00:12:09: Getting a legacy company change its workflows slow and messy and incredibly expensive By financially subsidizing adoption phase guaranteeing return to GP open AI essentially buying permit distribution networks.

00:12:22: Because they know that once an AI layer is deeply embedded into a company's core operational workflows, ripping it out becomes nearly impossible.

00:12:29: Exactly!

00:12:30: It's a wildly aggressive customer acquisition cost.

00:12:32: but they are locking in massive enterprise contracts for the next decade.

00:12:37: That is brilliant strategic play.

00:12:39: But here where hits a massive totally unglamorous wall inside these portfolio companies?

00:12:47: Even with open AI subsidizing the rollout, AI relies on one thing and that's data.

00:12:53: And the data foundation in most mid-market companies is just completely broken.

00:12:57: It's

00:12:58: this ceiling they keep hitting their heads against.

00:13:00: Steve Budd ran a survey of London PE professionals recently and The gap between affirms ambition, and their portfolio company's reality Is

00:13:08: glaring?

00:13:08: Let me guess...the data isn't ready

00:13:10: Not even close!

00:13:11: The parent firms want to move fast but fifty three percent Of the Portfolio Companies are lagging simply because Their Data Infrastructure is a mess.

00:13:19: According To the Survey only twenty seven percent actually have clean and organized enough for scaled AI adoption.

00:13:25: Wow,

00:13:25: and Karsten W echoed this dynamic perfectly.

00:13:28: he argued that the conversation right now shouldn't be about building flashy dashboards.

00:13:32: it should

00:13:34: Because if you look under the hood of these portfolio companies, You don't see clean data lakes.

00:13:39: You see fragmented legacy applications, manual Excel workarounds...

00:13:44: Yeah and entirely inconsistent KPI definitions across different departments which kills the whole premise of advanced AI Totally!

00:13:51: ...you cannot build agentic AI Which is AI designed to make autonomous operational decisions on top a spreadsheet where the CFO The CMO And head-of-sales all define revenue differently.

00:14:03: The math simply won't compute.

00:14:05: If the human management team is wasting three hours a week debating whose numbers are accurate, an AI agent it's just going to automate that confusion at light

00:14:13: speed.".

00:14:14: Right

00:14:14: you need a semantic layer like a single unified translation of your business data tied directly to your enterprise value drivers before and AI can do anything remotely useful

00:14:24: which really makes me question the way some of these GPs operate from the top down.

00:14:28: Can a firm actually or a value creation playbook, and expect that magical twelve percent growth to materialize.

00:14:38: Romain Bagramian had a brutally honest take on this from our recent Value Creation forum.

00:14:43: He warned when you hear the word Playbook in PE today your BS radar should immediately go

00:14:49: off.

00:14:49: Oh I agree completely.

00:14:50: The idea of complex operational turnarounds can be fully codified into a manual is just complete myth

00:14:57: Right.

00:14:58: He noted that these five hundred page, operational playbooks are mostly just marketing props for fundraising.

00:15:03: Yeah Real EBITDA improvement is situational craftsmanship.

00:15:07: It depends entirely on localized market conditions specific labor dynamics technical debt and cash constraints.

00:15:13: Exactly A pricing strategy that works perfectly in a B to B sauce company could literally bankrupt a localized healthcare services business.

00:15:21: It requires deep discipline, yes.

00:15:23: But it is never a copy-paste exercise

00:15:25: and that situational awareness is crucial especially when the financial ground beneath these companies are shifting which perfectly sets up our fourth in final theme private credit.

00:15:35: right if Private Credit Is The Floorboards Holding All These Highly Leveraged Operationally Complex Deals Up We Need To Talk About The Fact That Those FloorBoards Are Starting to Splinter.

00:15:44: Let's

00:15:44: unpacked attention here because Private Credit Has Been The Absolute Doraling Of The Financial World For The Last Few Years.

00:15:51: Saina Esmeri pointed out recently that the grand illusion of quarterly liquidity in private credit is starting to

00:15:57: fracture.

00:15:57: Yeah, for years The pitch two investors was basically the holy trinity of finance higher yield lower volatility and quarterly liquid.

00:16:05: but you cannot promise Liquid cash withdrawals on top a fundamentally illiquid hard-to-sell loans without eventually facing the music.

00:16:14: No, the mechanism works flawlessly when confidence as high and money is flowing in.

00:16:19: But the moment sentiment drops and investors want cash out, the gates immediately go up.

00:16:24: And we are seeing those gates go up right now.

00:16:26: Giants like Aries, Apollo & BlackRock are actively capping withdrawals.

00:16:31: Amiri noted that Aries recently had investors request to redeem over eleven percent of their capital.

00:16:36: Wow!

00:16:37: Yeah That is double the allowed quarterly limit and Aries honored less than half it.

00:16:42: The funds are enforcing strict five-percent withdrawal caps across board as redemption requests surge.

00:16:48: It is the first real stress test of this asset class at this scale.

00:16:53: Andre Cronelli-Dompe offered a phenomenal analysis of this mechanism via The Financial Times, breaking down where the actual systemic risk lies... Because

00:17:01: everyone's wondering if it was in a two thousand eight situation?

00:17:04: Right and he points out that the core tension everybody misses is private credit yields high returns because its illiquid That Illiquidity premiums are not a bug but that illiquidity cuts both ways into crunch.

00:17:17: So to ask the obvious question, are we looking at a two thousand eight style meltdown where the debt itself is

00:17:23: toxic?

00:17:24: Dumpy clarifies that it's fundamentally different.

00:17:26: At the fund level.

00:17:27: The risk is mostly contained.

00:17:29: these are not.

00:17:29: they heavily leveraged Toxic subprime time bombs of twenty-eight.

00:17:33: okay That's early.

00:17:34: yeah These loans are generally over collateralized and structured to absorb localized losses.

00:17:38: the real danger the actual pressure point that regulators or sweating over his limited partner liquidity.

00:17:45: Okay, break that mechanism down for me.

00:17:46: How does an ill liquid LP trigger broader market contagion?

00:17:50: So think about the pipeline of capital.

00:17:52: there are hundreds of billions of dollars in uncalled commitments sitting out there.

00:17:57: In a stress scenario.

00:17:58: The general partners are still going to call that capital because they need it To rescue struggling portfolio companies or fund previously committed deals.

00:18:06: right.

00:18:07: the LPs like pension funds endowments Are legally obligated to deliver that cash regardless of the broader market conditions.

00:18:16: So if an LP is already facing a liquidity squeeze because their private credit investments are gated and they suddenly get a massive capital call from a buyout fund, They have to find cash immediately!

00:18:26: And they can't sell their private assets.

00:18:28: so they have to sell what is liquid?

00:18:30: Ah...they're forced to liquidate public equities in bond.

00:18:33: Exactly That's how a localized issue in private credit creates second-order effects.

00:18:39: It forces institutions to dump public stocks, to cover private obligations spreading contagion into the broader financial system.

00:18:47: So The Fund itself doesn't blow up but the LPs scramble for cash destabilizes everything else.

00:18:52: that makes total sense.

00:18:54: But To play devil's advocate here.

00:18:56: David Harmeier and Ahmed Hussein shared some notes from a recent Newburger-Burman session with allocators And they provided a pretty strong counter perspective.

00:19:05: Yeah, most of these allocators actually believe the underlying fundamentals of the debt remain perfectly strong.

00:19:11: They view The Current Panic as a sentiment issue not a structural

00:19:15: rot.

00:19:16: Right they argue that the panic around BDC's business development companies which are essentially publicly traded vehicles That invest in private mid-market companies is largely driven by retail investor jitters

00:19:28: Because the underlying loans still mature in three to four years, they are still paying their quarterly coupons and the companies are mostly fine.

00:19:35: True though Hussain did note that the allocators feel The more consequential risk is actually localized In the software sector where net revenue retention Is starting To decline as enterprise clients shift Their software budgets toward internal AI capabilities.

00:19:50: Right but the credit structures themselves?

00:19:52: The allocators think they'll self-correct once raids settle.

00:19:55: It's a completely fair counterargument based on the math of the loans, but it entirely ignores the reality of human behavior.

00:20:03: in a panic.

00:20:04: Harold Berlinik framed the current private credit redemption window using game theory specifically calling it a classic prisoner's dilemma.

00:20:13: Oh I love a good game theory application.

00:20:15: Explain.

00:20:17: Well, every single investor is forced to make their redemption decision in total isolation.

00:20:22: They have limited information because funds only disclose their financial results after the Redemption window has already closed.

00:20:28: Crucially there's absolutely no financial penalty and no upfront cost But there is a massive, severe potential penalty for not requesting redemption and being left behind as the last investor in fund that's gating its cash and holding degrading assets.

00:20:45: It's the ultimate asymmetric risk if zero cost ahead of exit but you might be severely punished to hold it back.

00:20:53: rational self-interest dictates you rush the exit

00:20:56: Exactly!

00:20:57: It actively incentivizes a run on completely regardless of whether the underlying fundamentals are actually strong or not.

00:21:05: You just don't want to be a bag holder for assets whose paper valuations you might not even fully believe in anymore.

00:21:11: Precisely It is a structural psychological vulnerability that has been tested in real time across the private credit markets right now, which really brings us to the broader implication of everything we've unpacked today.

00:21:24: We have seen that the macro-multiple expansion playbook is officially dead and exits are completely log jammed requiring highly structured conditional terms just to clear the pipes.

00:21:34: that the vast majority of mid-market portfolio companies simply do not

00:21:41: have.

00:21:41: Right, and the private credit ecosystem financing.

00:21:43: all this is facing its first real test of investor psychology in LP liquidity.

00:21:49: What's a lot to navigate?

00:21:51: It is So if we zoom out look at big picture it leaves you with critical structural question If financial engineering leveraged driven skills that got private equity titans over last fifteen years are fundamentally different from the operational, data-driven and AI integrated skills needed to survive the next fifteen.

00:22:12: How long until limited partners completely rewrite how they underwrite and diligence general partners

00:22:30: themselves?