Best of LinkedIn: Private Equity Insights CW 16/ 17

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00:00:16: Yeah, and welcome to the deep dive.

00:00:19: Right so if you're operating in the M&A VC your consulting space right now You know The Playbook is basically changing daily.

00:00:26: we are seeing a massive exit traffic jam that it's just choking private markets

00:00:32: completely choking them.

00:00:33: Yeah,

00:00:34: so today we're cutting right through the noise.

00:00:35: We're looking at the underlying mechanics of this liquidity crunch The shifting mandates inside portfolio companies and honestly these somewhat counterintuitive sectors where the smartest money is suddenly flocking.

00:00:46: it Is super counter-intuitive?

00:00:48: I mean if you look at the pitchbook Q one twenty twenty six data We've been seeing across our timelines It paints a really stark picture of this gridlock.

00:00:55: yeah because private equity has what Two trillion dollars in dry powder just sitting in the bank right now.

00:01:01: Two trillion, which is insane!

00:01:04: Right but despite that massive pile of cash on the sidelines fundraising his entirely flat year-over-year The pipeline is completely clogged

00:01:14: Which I mean nobody can get a check.

00:01:15: Exactly Snorkelford Hansen captured the current LP sentiment perfectly?

00:01:20: He said DPI's new IRR

00:01:22: DPI being distribution to paid in

00:01:25: Because for the last decade, GPs could comfortably raise their next vintage based almost entirely on you know paper markups.

00:01:33: LPs just accepted those high IRRs on faith!

00:01:36: Yeah they were just trusting the process.

00:01:37: But today LPs are aggressively demanding realized cash distributions before they commit a single new dollar Which

00:01:45: makes total sense.

00:01:46: I mean focusing on IRR in this environment is essentially Zillow surfing your own home's value.

00:01:51: Oh

00:01:51: that's great way to put it Right.

00:01:53: Like, you log on.

00:01:53: You see your house went up twenty percent and that paper markup feels incredibly validating.

00:01:58: Sure!

00:01:58: You feel rich for a minute

00:01:59: Exactly.

00:02:00: But it's completely meaningless until someone actually hands you check And LPs are basically revolting against these zest of

00:02:07: it.

00:02:07: Yeah they want the cash

00:02:08: but with IPO windows being notoriously fickle in strategic M&A suppressed by all this macro volatility The math on returning to capital just doesn't work through traditional channels.

00:02:19: So how are GBs actually getting liquidity back to LPs?

00:02:23: Well, it's forcing a massive structural maneuver across the whole asset class.

00:02:28: J Alfred Ritter shared some data that highlights how GPs are engineering their way out of this corner.

00:02:33: Okay what's the maneuver?

00:02:34: The private secondary market.

00:02:36: It had a record last year and GP led continuation vehicles accounted for uh, one hundred sixteen billion dollars at volume.

00:02:44: Wait,

00:02:44: one-hundred sixteen billion Yeah Just in continuation vehicles.

00:02:47: Yeah,

00:02:48: we are at a point where GP leads are rivaling traditional LP-led secondary sales

00:02:53: which is the complete reversal of how these vehicles used to be perceived right?

00:02:56: I mean five years ago if a GP rolled an asset into a continuation fund The market just assumed it was a distressed asset that they couldn't offload.

00:03:03: Exactly there's huge red flag but that stigma has entirely gone now Really Oh yeah High quality buyout.

00:03:08: GP leds Are currently trading at ninety to ninety two cents on the dollar.

00:03:12: It's highly rational mechanism

00:03:14: though.

00:03:14: How so like mechanically.

00:03:16: Well, think about it.

00:03:18: if you hold a crown jewel asset but your fun life is expiring and Your LPs are just screaming for liquidity

00:03:25: You essentially sell the asset to yourself in a new vehicle.

00:03:28: exactly.

00:03:29: The old LPs get their cash payout which resets the DPI And New secondary LPs step into fund the next phase of growth.

00:03:37: It bypasses the frozen public markets entirely right?

00:03:40: But I mean that structural band-aid doesn't solve the operational reality for the people who are actually running these portfolio companies.

00:03:47: No,

00:03:47: it definitely doesn't

00:03:49: because if traditional exits are stalled The median hold periods are stretching well beyond that traditional three to five year flip.

00:03:56: Oh way Beyond.

00:03:57: we're routinely seeing companies held for six seven or even eight years now

00:04:01: and you can't rely on market timing Or financial engineering over an eight-year horizon.

00:04:05: at that point You were forced to actually run and grow the underlying business.

00:04:09: Yeah, the music stops and you have to actually operate.

00:04:12: This is where The Mandate completely shifts from financial engineering to pure execution.

00:04:17: Maxwell Sell as I recently noted this on LinkedIn he basically called the definitive end of the old playbook-the days.

00:04:32: But those days are over.

00:04:34: That era relied on zero interest rates in multiple expansion, today multiples are contracting and debt is expensive.

00:04:41: So what's the new benchmark?

00:04:43: Well, Sebastian Esser put a very sharp number on what this new reality demands.

00:04:47: To achieve his successful exit and hit the required MOIC.

00:04:50: today,

00:04:54: twelve percent EBITDA growth is.

00:05:03: And Francisco Lara and Cal Killian pointed out that VCPs, those massive you know ninety page value creation plans designed by elite consultants.

00:05:15: Yeah They rarely fail in the boardroom.

00:05:17: No

00:05:17: they always look great on paper

00:05:19: Exactly!

00:05:20: They fail quietly In the trenches during execution.

00:05:23: The consensus seems to be That Great Execution isn't flashy.

00:05:28: It requires a relentless weekly operating cadence not just polished quarterly board reviews.

00:05:34: It means stripping away the twenty initiatives on The White Board and aggressively focusing only two to three operational priorities.

00:05:41: Because

00:05:41: if a management team tries to execute twenty initiatives simultaneously, they achieve none of them.

00:05:47: Zow is zero.

00:05:48: But this operational pressure introduces critical failure point I think.

00:05:53: What do you mean?

00:05:53: Well If strategic plans are fundamentally sound And the sponsors know what needs to be done.

00:05:59: Why is execution breaking down so frequently across the mid-market right now?

00:06:03: Is it the system or people?

00:06:05: Honestly, It's a profound talent mismatch A

00:06:07: Talent Mismatch.

00:06:08: Yeah Look at data on executive tenure.

00:06:11: Eiffelt Karp highlighted that average ten year for PE backed CFO is just two three years Two

00:06:17: Three Years.

00:06:17: But wait we said hold periods are pushing six seven eight years.

00:06:21: Exactly, that's the problem.

00:06:22: In public companies CFO tenure is closer to five or six years but in PE if you structure a CFOs equity payout for a quick three-to four year flip You can't be surprised when they mentally check out at your four of seven-year hold

00:06:36: right?

00:06:37: You're expecting sprinters to suddenly run marathons.

00:06:39: That's exactly what it is.

00:06:40: The timeline shift is definitely breaking the traditional executive model because a cfo who successfully you know, implements an ERP system and scales a business from twenty million to seventy-five million they are operating at very specific velocity.

00:06:55: Yeah

00:06:55: that's builder phase

00:06:56: Right but the leader required.

00:06:58: take exact same company from seventy five million into clean audit ready high multiple exit.

00:07:04: That needs completely different set of institutional rigor.

00:07:07: Early stages demand pace but exit phases demand precision.

00:07:12: Precisely,

00:07:13: and Brian Apolito pointed out that this friction is causing severe C-suite burnout right now.

00:07:18: I bet.

00:07:18: Executives are looking at these extended hold periods and actively questioning if they even have the stamp enough for another prolonged cycle?

00:07:24: So sponsors are staring at this brutal equation right management teams or stretched thin executive turnover is looming And The bar for EBITDA growth has spiked to twelve percent.

00:07:36: It's a tough spot to be in.

00:07:37: Very So.

00:07:39: they are frantically looking for a silver bullet to scale operations without taking on massive headcount.

00:07:44: and Predictably everyone in the boardroom is pointing at AI.

00:07:48: Oh, of course there

00:07:49: Every single portcoe is currently under pressure to present an quote-unquote AI strategy.

00:07:55: But Lee McKay recently delivered a really heavy reality check on this trend.

00:07:59: Yeah

00:07:59: What does he say?

00:08:00: He warned that slapping it chatbot onto a broken process isn't a strategy.

00:08:04: It's just shopping Just

00:08:06: shopping.

00:08:06: That is an incredibly accurate description of the current technology due diligence we are seeing, right?

00:08:12: Carson W and McKay both basically argue that if your underlying data architecture is weak in your core processes or broken layering.

00:08:18: AI on top just gives you faster confusion

00:08:21: after confusion.

00:08:22: Yes It's like it's like laying high-speed rail lines over a swamp.

00:08:26: Oh total.

00:08:27: The model is just gonna process your bad data at light speed meaning You just arrive at the wrong financial conclusions much faster.

00:08:34: The infrastructure simply can't support the engine.

00:08:36: No, it can't.

00:08:38: TrueElfie doesn't come from just deploying a large language model.

00:08:41: It comes from the unglamorous really boring foundational work Cleaning data lakes standardizing workflows and establishing rigid-data governance so that a term like Gross margin actually means the exact same thing across every single division

00:08:56: Which is rarely the case in a rollup.

00:08:58: Yeah So what kind of technical talent do PE firms need to fix this swamp?

00:09:03: Because I'm assuming you can't just hire engineers from Google and expect them to thrive in a mid-market manufacturing company.

00:09:09: No, that is precisely where the hiring strategy is totally misfiring right now.

00:09:14: Mark Janssen argues that PE partners need immediately stop hiring big tech AI researchers for Mid Market Court Codes.

00:09:20: Stop

00:09:20: Hiring Them?

00:09:21: Yeah A researcher who's accustomed to pristine data sets and infinite compute budgets They will completely suffocate.

00:09:28: In a PE environment Where resources are constrained And The Data Is Total Mess

00:09:32: That makes a lot of sense.

00:09:33: So who do they hire?

00:09:34: Jansen

00:09:35: coined a brilliant term for what PE actually needs, he calls them AI scavengers.

00:09:40: AI scavangers?

00:09:41: yeah I like that.

00:09:42: it implies their sort of picking through the existing infrastructure rather than building from scratch.

00:09:47: exactly.

00:09:48: you need operators with heavy implementation scars.

00:09:51: An AI scavenger cares far more about headcount to revenue ratios than they do about fine-tuning neural networks.

00:09:58: They aren't trying to build proprietary models?

00:09:59: No, not at all!

00:10:01: They are finding manual workflows like accounts payable reconciliation or routing customer support tickets work flows that silently eating fifteen percent of your margin and killing those inefficiencies with targeted off the shelf automation.

00:10:15: So just ship a working billing agent in four weeks rather than spending six months on some massive strategic roadmap.

00:10:22: Exactly,

00:10:23: that's what actually moves the needle on EBITDA.

00:10:25: But you know... The conversation around AI isn't just about operational efficiency.

00:10:29: There is a much darker macro theme emerging for asset class right now.

00:10:34: Oh yeah!

00:10:34: The defensibility issue Right.

00:10:36: While sponsors try to use AI to improve their portfolios, Bruce Richards and Philip Kraft are warning that AI is simultaneously acting as an existential threat.

00:10:45: To the core assets PE has spent the last decade buying.

00:10:49: we're looking at a potential uh saucepocalypse

00:10:54: of gospel lips.

00:10:55: honestly this is arguably the most critical structural shift happening in private markets today.

00:10:59: yeah ai's fundamentally repricing software defensibility.

00:11:04: Kraft observed that a massive portion of the enterprise software built and scaled over last ten years wasn't protected by deep technical mode.

00:11:11: No, what was it protected?

00:11:13: It was protected by friction, it was simply too expensive and inconvenient for a competitor to replicate.

00:11:18: Right so if the competitor can now use AI coding assistance To clone your workflow sauce back in And user interface In what?

00:11:26: A month The barrier to entry basically drops to zero.

00:11:29: Your pricing power just evaporates

00:11:31: Exactly!

00:11:31: The moat is code and the code Is now commodity Thin software layers especially Workflow tools And those API dependent wrappers.

00:11:38: They are incredibly vulnerable.

00:11:40: This is not just a theoretical risk, right?

00:11:42: We are witnessing major PE software defaults.

00:11:45: Right now.

00:11:46: Oh absolutely!

00:11:47: Richard's pointed to recent high profile case where a sponsor appears basically handing the keys of a major software portfolio company over to creditors It potentially wiping out five point one billion dollars in equity.

00:12:01: Five point One billion.

00:12:02: that is staggering.

00:12:03: Yeah The debt thesis was underwritten on software multiples and retention rates that simply no longer exist in a post-AI world.

00:12:11: So if legacy soft remotes are collapsing, these massive PE funds still have to deploy their capital somewhere defensible?

00:12:18: Right!

00:12:18: They can't sit on two trillion dollars indefinitely... ...and keep charging management fees.

00:12:22: No!

00:12:23: LPs would riot.

00:12:24: so they're running the exact opposite direction.

00:12:26: Pivoting away from fragile code into physically embedded human capital intensive sectors.

00:12:33: boring business.

00:12:34: A

00:12:34: boring stuff is where the alpha is right now?

00:12:36: Yeah,

00:12:36: Sasha Orlaw shared a statistic that perfectly illustrates this capital flight.

00:12:40: private equity has poured fifty billion dollars into CPA and accounting firms over the last six years which

00:12:46: seems highly counterintuitive on the surface.

00:12:49: Right?

00:12:49: yeah why deploy fifty billion into accountants just as AI Is learning to automate tax returns

00:12:55: exactly?

00:12:56: but The underlying logic is ironclad when you actually look at the macro constraints.

00:13:01: The accounting profession is facing a severe demographic

00:13:04: cliff.

00:13:04: Right, the talent is just aging out...

00:13:06: Yeah!

00:13:08: Three hundred thousand accountants have permanently left the profession.

00:13:12: Another seventy-five thousand are scheduled to retire within the next three years.

00:13:16: Wow Almost every established firm has wait lists right now and it's actively turning away new business.

00:13:22: So when demand is legally mandated because you know You have to file taxes and audit financials and supplies plummeting You generate immense pricing power.

00:13:31: But a skeptic would still ask, you know why would pay a fifteen X multiple for an accounting firm when language model might do the core calculation work for fraction of cost in three years?

00:13:40: Because AI makes the accounting firm fundamentally more valuable not less.

00:13:45: The real value isn't manual data entry or tax return but is trusted client relationship strategic advisory and crucially liability transfer

00:13:58: liability transfer.

00:13:59: Right,

00:14:00: a business owner isn't going to trust a raw AI model to defend them in an IRS audit.

00:14:05: they want an actual human expert on the hook.

00:14:08: that makes total sense.

00:14:09: so by acquiring these firms PE sponsors can deploy those AI scavengers we discussed earlier to automate all the back office grunt work.

00:14:17: exactly this drastically winds the profit margins of the firm while the client continues to pay a premium for that entrenched trusted signature.

00:14:26: So the AI strips out the labor cost, but the firm retains the pricing power because of human trust factor.

00:14:31: You nailed it!

00:14:32: And Alexander Kalis brought up another massive beneficiary of this pivot away from tech—SME acquisitions.

00:14:39: Small and medium enterprises?

00:14:40: Right — we're talking about buying highly profitable founder-led businesses... Kayla's noted that rolling up these deeply boring acquisitions like HVAC installation, industrial maintenance or specialized manufacturing it's generating aggregate IRRs of thirty two to thirty five percent.

00:14:58: Thirty-two

00:14:59: to forty five percent!

00:15:00: That is venture level returns on HVIC.

00:15:03: And that thirty-five percent return isn't coming from taking extreme venture risk on some unproven technology.

00:15:09: It's coming form a demographic reality, right?

00:15:11: The retiring baby boomers?

00:15:12: exactly.

00:15:13: there are thousands of profitable durable businesses owned by retiring founders who have absolutely no succession plan.

00:15:20: historically institutional capital just ignored them because the deal sizes were too small to move the needle for a mega fund but

00:15:25: today They represent some of the most compelling risk-adjusted returns available.

00:15:29: Yeah, because you are buying a business that already possesses local monopolies physical assets and deeply entrenched customer bases.

00:15:37: So it forces a complete recalculation Of what constitutes a moat in twenty twenty six.

00:15:43: For you listening right now You have to rethink this.

00:15:46: A moat is no longer a proprietary software stack That an offshore developer can just replicate over weekend

00:15:51: Not anymore!

00:15:56: Amote is a highly fragmented industrial business that owns the customer relationship, and it's just waiting for a sponsor to inject a proper operational backbone.

00:16:07: Which

00:16:07: brings this entire landscape right back Whether a sponsor is holding an accounting firm, and industrial manufacturer or trying to defend complex software platform.

00:16:18: The returns are no longer dictated by the entry multiple in the debt package right?

00:16:22: They're returns are dictated entirely but what they operator actually does to restructure the workflows while holding the asset

00:16:29: that you have To do work.

00:16:31: I want end on critical data point ties this all together for our listeners.

00:16:34: let's hear it.

00:16:35: we talked about desperate rush.

00:16:37: integrate AI hit those growth targets.

00:16:40: Well, Evan S. recently shared research showing that sixty-eight percent of PE funds believe simply hiring AI talent will solve their scaling issues.

00:16:50: Six E eight percent?

00:16:52: Wow!

00:16:52: But only fifteen percent.

00:16:54: those same funds are actively using incentive models tied to AI adoption.

00:16:59: Only fifteen percent.

00:17:00: That is wild

00:17:01: Right.

00:17:02: but honestly...that gap right there between expectation and compensation Is exactly why VCPs fail in execution.

00:17:09: Exactly

00:17:10: If you drop a new automated workflow onto the desk of front-line manager and that system unlocks millions in EBITDA.

00:17:18: But that manager doesn't see a single dollar of financial upside.

00:17:21: Why would they ever adopt the friction?

00:17:23: Of learning, The new system

00:17:24: won't just keep using Excel

00:17:26: exactly.

00:17:27: you cannot hire your way out of A fundamentally misaligned operating model if the incentives of the people doing the work Aren't strictly tied to the value being created.

00:17:36: the most advanced technology in the world is going To set idle.

00:17:38: it's

00:17:38: totally useless.

00:17:39: at the incentives aren't aligned

00:17:41: spot on.

00:17:42: Well, if you enjoyed this episode new episodes drop every two weeks.

00:17:45: also check out our other editions on venture capital M&A and strategy in consulting.

00:17:50: thanks for joining us with a deep dive.

00:17:52: don't forget to subscribe.