Best of LinkedIn: Private Equity Insights CW 18/ 19

00:00:00: provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about private equity in CW-Eighty and Nineteen.

00:00:06: Frenness supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production

00:00:13: capacity.".

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

00:00:16: now I want you just consider this number for a second.

00:00:20: Three point seven trillion dollars.

00:00:22: It's massive, right?

00:00:24: That is the amount of unrealized private equity value that is just well currently trapped in portfolio companies globally.

00:00:31: The exit door is essentially jam shut.

00:00:33: yeah Completely, Jim.

00:00:34: So today we're doing a deep dive into what happens when that old playbook of buy weight and sell suddenly breaks down?

00:00:42: And the entire industry has to figure out how to actually operate a business.

00:00:45: Yeah!

00:00:45: That three point seven trillion dollar overhang I mean it's forcing The most significant structural shift in private equity We have seen In gosh-over decade.

00:00:54: Oh easily a decade Right.

00:00:56: If you are listening To this You already know the environment Has fundamentally changed.

00:00:59: So today's briefing, we're synthesizing the top private equity trends seen across LinkedIn over the last two weeks.

00:01:06: Which is a lot of ground to cover?

00:01:07: It is!

00:01:08: We are zeroing in on uh...the new operating mandates.

00:01:11: The leadership disconnects were seeing this shift from like AI hype To actual deployment and finally how firms or engineering liquidity when traditional M&A routes Are just frozen.

00:01:22: So let's jump straight into that structural shift.

00:01:24: Christopher Gunn highlighted some really fascinating data from PWC's twenty-twenty six private equity outlook, and it completely flips the historical PE model on its head.

00:01:34: Yeah, that data was really eye-opening.

00:01:36: According to this operational transformation is now driving forty seven percent of PE value creation.

00:01:42: Meanwhile financial engineering which you know used to be the absolute golden child of the industry has

00:01:48: plummeted

00:01:49: Right from fifty one percent a decade ago down at just twenty five percent and Scott Engler actually framed This perfectly in his post.

00:01:56: he basically said That beta dressed up as alpha simply no longer works.

00:02:00: yeah Beta dressed Up as Alpha it's such A great way To describe The Twenty Tenths Because if for a long time you could just buy a platform, leverage it up with super cheap debt and uh... You'd just ride the wave of macroeconomic multiple expansion.

00:02:11: Just wait for market to do heavy lifting.

00:02:13: Exactly!

00:02:14: You exited massive premiums.

00:02:16: The financial engineering was primary mechanism.

00:02:18: You didn't really have improve core operations As long as entry-and-exit multiples expanded favorably

00:02:24: Right?

00:02:24: The rising pie lifting all boats

00:02:26: Yeah.

00:02:27: But today With higher cost capital and compressed multiples, operating discipline is genuinely the only compounding lever left on the table.

00:02:36: You have to actually expand margins from inside

00:02:39: out.".

00:02:39: Which

00:02:39: I mean...the theory makes perfect sense but execution is where things are just completely breaking down.

00:02:44: Oh for

00:02:44: sure.

00:02:45: Look at Lima Cabe's critique.

00:02:47: He points that every single firm walking into a deal today has value creation plan of VCP But if you put them side by They're identical.

00:02:55: Literally,

00:02:55: identical!

00:02:56: Yeah it's the same font and buzzwords they all promise.

00:03:00: you know procurement savings pricing optimizations sales effectiveness.

00:03:05: but McCabe argues these plans aren't failing because they lack innovation right?

00:03:09: They fail because nobody wants to deal with political inconvenience of actual change management

00:03:14: Because Change Management is fundamentally disruptive.

00:03:18: I mean telling an acquired founder that you are overhauling their legacy procurement system or Changing the sales comp structure they literally built from scratch.

00:03:27: It is incredibly painful.

00:03:28: Yeah, it sounds like PE firms spent a decade basically buying houses and just relying on the neighborhood to gentrify And now they actually have to learn how to renovate the kitchen.

00:03:38: That's exactly which

00:03:39: does they even have the tools

00:03:41: well often know?

00:03:43: kit Lyle identified this as the translation gap.

00:03:45: yeah You have these brilliant you know, airtight investment theses crafted over six months of rigorous due diligence.

00:03:52: Right

00:03:53: a hundred page decks?

00:03:54: Yeah The sponsor is thinking in terms of IRR MOIC debt covenants but management team they operate in terms daily lead flow employee retention unit economics

00:04:04: totally different languages exactly

00:04:06: so the thesis dies before first board meeting because the sponsor fails to translate those high-level financial mandates into like actual Monday morning priorities for operators.

00:04:16: They literally just drop the diligence deck on the CEO's desk and say go execute.

00:04:21: And naturally, the management team just tries to do everything all at

00:04:24: once.".

00:04:24: Yeah which is a disaster.

00:04:26: Eric Bonder in guest author Brian Gustafson wrote extensively about this.

00:04:30: when looking at lower middle market growth stalls

00:04:32: right?

00:04:33: The lack of sequencing?

00:04:34: yes

00:04:35: these portfolio companies hit wall because they try to roll out new pricing strategy while simultaneously implementing Exactly.

00:04:46: It's the corporate equivalent of trying to replace the foundation in your house while tearing off the roof and rewiring the kitchen, you can't live in that house whilst being demolished.

00:04:54: Which is what kills all this momentum in year one.

00:04:57: You know Gustuson argues we have to stabilize core commercial fundamentals first Secure base revenue And only then do start layering new go-to market initiatives.

00:05:06: But to prioritize those initiatives you need a very specific type leadership.

00:05:13: If operational execution is the only viable lever left, The entire model hinges on who's sitting in a C-suite pulling those levers.

00:05:22: And across the landscape, right now there's a severe talent disconnect.

00:05:25: Huge

00:05:26: disconnect.

00:05:26: Ifit Karp called out this glaring misstep that PE firms consistently make specifically in the finance function.

00:05:34: Firms are hiring CFOs based on well linear polished resumes rather than matching specific profile of the CFO to actual investment strategy

00:05:43: which is so common.

00:05:44: Yeah, she's a great comparison.

00:05:47: if your strategy involves integrating four bolt-on acquisitions in eighteen months that's a highly chaotic aggressive buy and build environment

00:05:55: right?

00:05:55: And placing a steady state CFO into that environment Is just a disaster waiting to happen completely.

00:06:01: I mean A steady State CFO might be brilliant at optimizing cash flow managing compliance running predictable reporting but a Buy & Build CFO?

00:06:09: they need To know how to merge three different proprietary accounting systems.

00:06:14: And consolidate completely disparate payrolls?

00:06:16: Yeah,

00:06:16: while handling the cultural fallout of an acquisition all while keeping the board updated you aren't just hiring a title You're hiring for this specific phase and velocity in business.

00:06:27: David Mackie took it even further when talking about how these mismatch leaders handle information because every portfolio company claims they are data driven.

00:06:35: now

00:06:35: Oh!

00:06:36: Of course everyone is data-driven.

00:06:37: But Mackie observes that they completely lack leaders who can translate messy, fragmented data into actual board-ready decisions.

00:06:46: They want to move EBITDA in weeks not quarters.

00:06:50: but instead of making hard choices... ...they just hide behind executive dashboards

00:06:54: Because dashboards provide the illusion of control without the actual substance of reality.

00:06:59: Yeah William B shared this phenomenal post calling these Executive Dashboards watermelons.

00:07:04: Watermelons, I love

00:07:05: that.

00:07:05: green on the outside red on the inside.

00:07:07: yeah he shared this incredible story about a critical system replacement.

00:07:12: The entire value creation plan hinged on this system.

00:07:15: okay and they get.

00:07:16: could have dashboard reported as solid Green status deliverables met?

00:07:20: The board was thrilled.

00:07:21: but when you bypass the dashboard an asset chief architect to actually demonstrate the system

00:07:25: let me guess it didn't exist.

00:07:27: the architect just started drawing on a whiteboard.

00:07:29: It Was vaporware.

00:07:30: The system did not exist.

00:07:31: Yeah, that is wild and you know if you're an operating partner listening to this You've probably seen those watermelon dashboards firsthand.

00:07:39: William B argues That real operational insight doesn't come from a tableau chart.

00:07:43: No way it does.

00:07:44: It comes From actually sitting with the shift managers on the warehouse floor And understanding the why behind the numbers.

00:07:51: Why Is throughput down?

00:07:52: Why is inventory piling up?

00:07:53: The dashboard won't tell you the forklift has broken

00:07:56: Exactly or that the barcode scanner software crashes every hour.

00:08:00: But finding the truth requires an operating partner who is comfortable with friction.

00:08:05: Paul Press had a highly contrarian take on how to source these partners, he suggested that PE firms need stop screening for perfect flawless track records

00:08:15: Which goes against everything industry normally does.

00:08:17: Right

00:08:18: When interviewing at OP ask them walk through a deal they got completely wrong.

00:08:22: Ask them about the integration that stalled or the turnaround ended in bankruptcy.

00:08:26: Right, because pattern matching from wins is easy when market is up.

00:08:29: Exactly!

00:08:30: A rising macroeconomic tide lifts all boats.

00:08:34: Pattern Matching From The Losses Is The Actual Job.

00:08:38: But hold on though... We're putting a lot of the blame here on management teams and operating partners for taking too much or hiding behind dashboards, but aren't the PE boards essentially self-sabotaging their own investments by micromanaging?

00:08:50: That is very valid pushback.

00:08:52: Because if the board is forcing this aggressive value creation plan down the throat of CEO mandating new systems in hires pricing all in Q one who's actually at fault when it breaks?

00:09:05: And The Reality On The Ground Absolutely supports that view.

00:09:09: McQuall-Salazar shared some incredibly jarring feedback directly from PE backed CEOs, these leaders aren't just dealing with normal stress.

00:09:17: they're suffering from chronic debilitating burnout and it's directly caused by board overreach.

00:09:23: Boards are forcing half-million dollar consultants onto the management teams, overriding localized decisions and strictly enforcing playbooks built for a twenty-twenty one market that just doesn't exist anymore.

00:09:33: Yeah handing their CEOs a Twenty-Twenty One Playbook.

00:09:45: But today, capital is expensive and the mandate is margin preservation in extreme efficiency.

00:09:51: If a board micromanages as CEO using outdated metrics it creates an impossible operational paradox...

00:09:57: Completely impossible!

00:09:58: ...and that intense pressure to magically expand margins without increasing headcount?

00:10:03: Well that leads us directly into the massive shift of how industry viewing AI.

00:10:08: Yeah, the tension there is so clear.

00:10:10: And the conversation around AI has profoundly matured over the last few weeks.

00:10:15: we are moving rapidly past the hype phase and into a period of heavy warranted skepticism.

00:10:21: It's

00:10:21: about time.

00:10:22: Karsten W bluntly stated that any AI first strategy that lacks at data-first foundation is completely flawed.

00:10:28: There's this massive misconception you can just plug in large language model into a broken ERP system, and it magically fixes the operations.

00:10:36: But the mechanism of AI just doesn't work like that?

00:10:38: It doesn't fix bad data...it amplifies it!

00:10:41: Exactly If your sales pipeline is fragmented across five CRMs in your inventory as manually updated in Excel, applying AI means you're going to generate incorrect insights at an incredible scale.

00:10:51: Right

00:10:52: The foundational plumbing Like Data Governance Clean architecture A single source-of truth That has to be built before you can automate anything

00:11:00: which ties directly into how buyers actually care about these initiatives.

00:11:05: Davey AJ made it incredibly clear the buyer will not pay a premium for your AI pilot,

00:11:10: no they won't.

00:11:10: having a slide in your deck about exploring generative workflows adds literally zero enterprise value.

00:11:16: Buyers demand operating proof.

00:11:18: They want to see the SG&A line visibly drop, they want proof that AI has made the business safer more efficient and margin expansive.

00:11:26: But acquiring that proof is incredibly difficult right now because of a massive blind spot in the due diligence phase.

00:11:33: Stuart Wilson pointed out that roughly half of middle market deals today involve some sort of AI driven value creation thesis.

00:11:40: Half them?

00:11:41: Yeah The sponsor assumes they can just boost EBITDA post-close by automating workflows.

00:11:46: Yet almost none of these deals undergo rigorous pre-close AI diligence.

00:11:50: Wait,

00:11:50: why not?

00:11:51: Because the tier one consultancies charge half a million dollars for tech diligence.

00:11:56: It completely kills the deal economics For a middle market buyout.

00:12:01: and if you ask The software vendors for advice well they're naturally biased towards selling You their own product.

00:12:07: so sponsors are just underwriting an aggressive AI thesis.

00:12:10: Completely

00:12:11: blind totally blind.

00:12:12: however We're seeing a massive shift in how the market is bypassing both this diligence gap and the talent shortage we talked about.

00:12:19: Houston reported a really fascinating development, Anthropic and Gorman Sachs are teaming up to embed AI engineers directly inside mid-market portfolio companies.

00:12:31: They aren't just selling sauce licenses, they are physically putting highly specialized engineers into the business to redesign legacy workflows from inside out.

00:12:39: That's huge.

00:12:39: and a Rinkumar Sundaraj actually highlighted a similar move by OpenAI.

00:12:44: They've launched DeployCo which is basically guaranteeing a seventeen point five percent return for PE firms.

00:12:50: And again that mechanism isn't handing over an API key their deploying actual human talent inside operations.

00:12:56: Wait so open AI and Anthropic or basically acting like McKinsey now Sundaraj asks a vital question about this guaranteed return, though.

00:13:04: Is it just about cutting costs by automating the old inefficient way of doing things or are we actually building new business models?

00:13:11: Well Christoph Joost argues its both especially within software portfolio companies.

00:13:16: Historically there was an unwritten rule in private equity Never touch the legacy code.

00:13:21: Too risky takes too long.

00:13:23: Exactly

00:13:24: rearchitecting a decade-old software platform could take five to ten years.

00:13:29: it would consume the entire standard hold period.

00:13:31: So PE firms just put a nice new UI on the front end, repackaged the pricing and relied on aggressive sales.

00:13:37: Yeah basically slapping a tarp over a leaky roof instead of fixing the foundation.

00:13:41: Right but Joe's points out that AI changes the underlying math of tech debt.

00:13:46: AI coding assistants allow firms to rewrite that legacy code in months instead of years.

00:13:51: for The first time the core product architecture itself has become a fast viable value creation lever

00:13:57: Which brings us to the final, kind of overarching theme connecting all this.

00:14:02: Why is there such a frantic desperate push for operational proof and AI margin expansion right

00:14:07: now?

00:14:08: Because The Exidor jam shut

00:14:09: Exactly!

00:14:11: The numbers from Louis Brecci are staggering.

00:14:13: There're currently thirty one thousand portfolio companies sitting globally that have not reached an exit.

00:14:19: That locks up three point seven trillion dollars in unrealized value And average hold times have stretched to six point eight years.

00:14:26: Yeah,

00:14:27: and Shayna Rehm layered in some McKinsey data showing over sixteen thousand of those companies had been held for more than four years.

00:14:33: These aren't necessarily distressed assets.

00:14:35: they're functioning businesses.

00:14:36: They just can't clear the peak.

00:14:38: twenty-twenty one entry multiples into today's market.

00:14:40: Right

00:14:40: let's walk through that math.

00:14:42: Frister had been confirmed that only fifteen percent of assets bought in twenty-twenty one have been exited by year four, which is well below historical averages.

00:14:50: Historic

00:14:50: low yeah

00:14:51: if a sponsor bought company and twenty twenty one at eighteen times EBITDA because debt was cheap.

00:14:55: And today the market only pays twelve times EBita.

00:14:58: The firm has to engineer massive revenue growth just to break even on the exit.

00:15:02: multiple compression ate their whole return

00:15:05: And that immense pressure is forcing structural changes.

00:15:08: Romain Fordin explained the explosion of continuation funds.

00:15:12: with traditional IPOs or M&A constrained, general partners need internal liquidity solutions.

00:15:19: It honestly sounds like a giant game of musical chairs, but the music stopped two years ago and instead of finding a new chair.

00:15:25: The players are just selling their current share to themselves.

00:15:28: that's a perfect analogy.

00:15:29: you bring in new investors to buy a minority stake.

00:15:32: pay out the original LPs But you keep the keys.

00:15:35: You give yourself another three to five years To execute the value creation plan And wait for the market to recover

00:15:41: right?

00:15:48: drift over a seven-year hold and don't just rely on leverage, they're the only ones who will be rewarded.

00:15:53: It all comes full circle if financial engineering is dead.

00:15:57: The only way to pry open that jammed exit door Is undeniable operational proof.

00:16:02: you have to renovate the house

00:16:03: which leaves us with a final provocative thought to mull over.

00:16:07: If this twenty twenty one vintage continues to stall And whole periods stretch towards seven or eight years we really have to ask At what point does private equity stop being a buy, fix and sell model?

00:16:19: And quietly transition into an industry of permanent capital management.

00:16:23: If the exit never comes how does fundamental promise to LPs

00:16:42: change?".