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.

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00:00:25: Right.

00:00:25: So let's dive into it,

00:00:26: okay?

00:00:26: Let's unpack this.

00:00:28: if you think private equity is still just a game of buying cheap pylon on debt and waiting for the market to make you rich well that era is basically dead

00:00:37: entirely completely over.

00:00:39: yeah

00:00:39: today we are looking at A three point seven trillion dollar backlog Of companies That Are stuck And We've Got An Industry That Is Basically Scrambling To Rewrite Its Entire Playbook.

00:00:48: so We Spent Time Distilling The Top Private equity trends seen across LinkedIn in calendar weeks, eighteen and nineteen.

00:00:56: And our mission for this deep dives is to figure out exactly how the smartest firms are surviving this frankly massive shift.

00:01:04: just to give you a baseline of where we are The old private equity model buying well and hoping for multiple expansion it's gone.

00:01:13: We're now on market that is intensely execution heavy.

00:01:18: Yeah, the macro environment has shifted so much.

00:01:21: And I think to frame this shift it's like... Think about the old PE model writing an escalator.

00:01:29: Oh!

00:01:29: I liked that.

00:01:30: Right Like you just step on market tailwinds do all of heavy lifting and gracefully arrive at top.

00:01:36: But today The new model is climbing a very steep flight stairs.

00:01:40: You're wearing really heavy backpack Exactly.

00:01:43: The returns have to be actively, like physically built on the factory floor.

00:01:47: It requires actual operational muscle.

00:01:49: now Right

00:01:50: and that ties perfectly into what Scott Engler and Christopher Gunn had been talking about recently.

00:01:54: Engler pointed out this macroeconomic environment has fundamentally shifted the entire burden onto operators.

00:02:00: Yeah And Gunn actually put a number on it which is staggering.

00:02:03: He noted that operational transformation now drives forty seven percent of private equity value creation.

00:02:08: Forty-seven

00:02:09: percent?

00:02:09: That's massive

00:02:11: I know, and that's up from just eighteen percent a decade ago.

00:02:14: So the value for pure financial engineering has just plummeted.

00:02:19: but The problem as Gunn argues is That most private equity operating teams haven't actually caught up.

00:02:25: No they really have it.

00:02:26: They're still using an advisory model that was you know built For that Financial Engineering era

00:02:31: right like dropping A playbook on a CEO's desk And saying good luck see ya next quarter

00:02:35: exactly?

00:02:36: And when You're climbing those stairs with a heavy backpack.

00:02:39: A hands-off advisory model just fails.

00:02:42: You need operators who can actually carry the weight.

00:02:45: What's fascinating here is how Neocabra connects this to the broader performance issues.

00:02:50: Oh, right!

00:02:51: She had that data on public markets.

00:02:52: Yeah she pointed out that PE has actually underperformed Public Markets for three consecutive years now And a huge part of it because leverage is so unforgiving Right now.

00:03:01: The debt is expensive.

00:03:03: So wait if operating teams are behind And debt is this unforgiving.

00:03:08: How do firms execute these turnarounds without, I don't know, breaching a covenant and going bankrupt?

00:03:12: Well, Cobra advocates for something she calls Covenant Sequencing.

00:03:17: Covenant sequencing!

00:03:19: Break down how that actually works in practice.

00:03:21: So because you're operating inside the super strict lender guardrails You can just overhaul the whole supply chain on day one... ...you have to use your covenant headroom strategically.

00:03:30: Okay.

00:03:31: so how they start?

00:03:32: Usually those sequence operational work?

00:03:35: by executing a quick pricing reset first.

00:03:37: By just raising prices, they get an immediate lift in EBITDA.

00:03:41: Right

00:03:41: which looks good on paper quickly

00:03:43: exactly.

00:03:44: and that higher earnings number improves their debt to EBITTA ratio.

00:03:48: so that quick win basically buys them the financial runway to undertake this slower structural transformation.

00:03:55: ah

00:03:55: I see like swapping out an IT system or whatever without Tripping the debt limits,

00:03:59: right?

00:03:59: It's this highly choreographed dance.

00:04:02: But you know You can't choreograph that dance from a boardroom.

00:04:04: Oh Which reminds me of this really incredible insight from William B. it Really gets to the human element of this operating shift.

00:04:12: well The watermelon dashboards.

00:04:14: yes the watermelon dash boards.

00:04:17: so William walked into a portfolio company and the executives showed him these beautiful perfectly green performance dashboards.

00:04:26: But he calls them watermelon dashboards because they are green on the outside, but you dig a millimeter deep And it's completely red inside.

00:04:33: It's just the illusion of control.

00:04:35: The executive see-green and think that covenant sequencing is totally fine.

00:04:38: Totally

00:04:38: fine Yeah!

00:04:39: But William actually asked to see the underlying system driving this data... ...and the chief architect literally had to start drawing vaporware on a whiteboard.

00:04:48: Wow,

00:04:49: just making it up?

00:04:50: Yeah the dashboard was total fabrication pulled from like fragmented Excel files and the executives have no clue because they never left board room.

00:04:59: Williams point is that data might get you right door but real inside only comes walking factory floor.

00:05:05: You actually sit with operators

00:05:07: Right!

00:05:08: Be there.

00:05:08: see why metric moved.

00:05:10: I think disconnect causing huge issues at C-suite level too.

00:05:14: It's a massive crisis.

00:05:15: IfitKarp and Dr.

00:05:17: Sasha Hagemueller were just highlighting this CFO gap.

00:05:21: Hagemailer pointed out that, A lot of mid-market deals fail post close simply because the finance seat is severely underpowered for the specific investment strategy.

00:05:32: I mean...I struggle with it little bit.

00:05:33: if you buy company with great product in good customers how does the CFO cause whole deal to fail?

00:05:41: Well

00:05:41: Because The CFO isn't counting money anymore.

00:05:43: In this environment, they have to be the architect of a value creation plan.

00:05:48: Carp was saying that PE firms keep hiring for the title but don't match the CFO's strategy.

00:05:54: Give me an example of it.

00:05:55: Imagine a steady state CFO with great resume and fantastic at managing stable predictable budget.

00:06:01: Sounds perfectly fine, right?

00:06:03: But drop that same person into a buy and build platform.

00:06:06: where they have to integrate four acquisitions in eighteen months They hit a brick wall.

00:06:09: Oh yeah merging accounting systems consolidating vendors

00:06:13: exactly the complexity spikes.

00:06:15: And if the CFO can't hold those numbers together In real time Margin leakage just runs quietly for quarters.

00:06:21: And by the time, the board notices boom!

00:06:23: The debt covenants are breached

00:06:25: Exactly and the stress from that is cascading upward to the CEOs.

00:06:29: Oh man yeah.

00:06:30: Maxwell Salazar shared some jarring stuff about this.

00:06:33: these PE-backed CEO's Are just burning

00:06:36: out.

00:06:37: It's a chronic stress problem.

00:06:38: it Is.

00:06:39: they're dealing with panic stricken boards who override their decisions?

00:06:48: Deliver, you know theoretical PowerPoints

00:06:50: exactly and then they call the CEO all weekend.

00:06:52: Salazar makes this chilling point that the leaders who can actually build value right now are incredibly rare.

00:06:59: Burning them out with self-inflicted board stress is just a luxury.

00:07:02: The industry cannot afford?

00:07:04: No it can't.

00:07:05: And if we connect this to the bigger picture because operators are burning out in the structural changes or taking too long Firms looking for shortcut

00:07:13: They want a magic wand

00:07:14: Right?

00:07:14: And naturally they think they found it an AI.

00:07:16: yep The great AI software patch to fix your EBITDA.

00:07:20: But the market is quickly realizing, AI isn't a magic wand.

00:07:26: Cartoon W posted this great warning about tech first mistake.

00:07:30: What's that?

00:07:31: Well he says AI doesn't fix bad data.

00:07:35: It amplifies it.

00:07:36: If you deploy an advanced AI model on a messy data foundation its just gonna generate chaos faster.

00:07:43: You absolutely need data governance and data ownership before you even touch the models.

00:07:48: Which brings up a glaring contradiction that Stuart Wilson pointed out.

00:07:52: he noted That half of every private equity deal right now is essentially an AI question.

00:07:56: Yeah, everyone wants to AI upside Right

00:07:58: but nobody's actually doing pre-close AI due diligence.

00:08:02: And it's wild because if you're buying the company to modernize.

00:08:05: Why wouldn't you check the data foundation before you close?

00:08:08: Well, because traditional consultancies are just too slow and too expensive for the middle market.

00:08:12: It takes them eighteen months to build a roadmap

00:08:14: And you don't have eighteen months when interest rates are this high.

00:08:17: Exactly!

00:08:17: You need this tech running on day ninety...

00:08:19: Well here's where it gets really interesting Because The big AI players realize that gap exists.

00:08:25: Arun Kumar Sundaraj & Hugh Sun highlighted massive market shift.

00:08:30: OpenAI has basically created a DeployCo and Anthropic is partnering with Goldman Sachs.

00:08:36: It's huge, they aren't just selling software licenses anymore

00:08:39: No!

00:08:39: They're embedding actual engineers directly into mid-market PE portfolio companies like putting people inside the operations to rebuild workflows from the ground

00:08:50: up.

00:08:50: Anarucamar noted something wild.

00:08:52: OpenAI is reportedly guaranteeing a seventeen point five percent return to win these co-investments.

00:08:57: Wait,

00:08:58: really?

00:08:58: How do they guarantee seventeen point one percent?

00:09:00: Is that just you know automating headcams to strip out costs?

00:09:03: or are They truly reimagining the business?

00:09:06: That is the big question because if you're just using AI too I don't know write emails faster You capout on returns fast to get a massive return and have to change The Business Model.

00:09:15: Steve Budd did a recap of recent AI strategy breakfast And he talks about agentic AI?

00:09:20: Right, AI that actually takes action on its own.

00:09:22: Yeah

00:09:22: and to use that you have to fundamentally redesign workflows around human judgment.

00:09:29: You don't just give people better tools...you step back and ask where should a human define the strategic intent?

00:09:34: And Where Should The AI Agent Take Over The Execution?

00:09:37: I think Dave Ajay summed this up perfectly Buyers won't pay a premium for cute AI pilots anymore.

00:09:44: We're in the operating proof era, right?

00:09:46: They demand operating proof that AI actually makes the business more safe More efficient and is actively growing revenue.

00:09:53: Yeah Ai pilots are useless if they don't hit the bottom line

00:09:56: Right.

00:09:57: And there's a reason this focus on Operating Proof & AI Efficiency Is so frantic right now.

00:10:01: It's because the exits Are totally jammed.

00:10:03: Oh The liquidity squeeze.

00:10:04: it's brutal!

00:10:05: I mean you can't realize any of This value If You Can't sell the asset.

00:10:08: Louise Brecci dropped this massive statistic, PE firms are currently sitting on a three point seven trillion dollar exit backlog.

00:10:16: Trillion?

00:10:17: With the TS

00:10:18: across thirty one thousand portfolio companies.

00:10:21: and Shan Ehrman added that over sixteen thousand of those companies have been held for more than four years.

00:10:26: And if you look at the data from Frister Haven and Nicola Ebmeyer You see exactly where the bottleneck is.

00:10:32: It's the twenty-twenty one vintage.

00:10:34: that Vintage is a massive outlier

00:10:36: because they bought at peak valuations.

00:10:38: Peak valuations essentially zero interest rates.

00:10:41: Normally by year four you expect to see about thirty percent of assets exited.

00:10:45: But for the twenty twenty one vintage only fifteen percent have exited.

00:10:49: wow half The normal rate.

00:10:51: yeah, the median holding period has stretched out two five point three years.

00:10:54: The assets bought back then just do not clear in today's market.

00:10:58: so if the IPO window was tight and traditional M&A is sluggish.

00:11:02: How are LPs actually getting their money back?

00:11:04: The pension funds need their

00:11:06: distributions.".

00:11:07: This raises an important question, and it points to a structural evolution.

00:11:11: Romain Fordin in Vladimir Kolas discussed this massive explosion of GP-led secondaries continuation funds and NAV lending.

00:11:19: Okay let's talk about continuation funds.

00:11:20: that's essentially the firm selling the asset from old fund into new one.

00:11:24: they also manage right

00:11:26: yeah

00:11:27: Which sounds crazy.

00:11:28: Are LPs okay with paying the same management team to keep holding an asset they couldn't sell?

00:11:33: A lot of them push back, but LPs are starved for cash.

00:11:39: The continuation fund brings in new secondary buyers To cash out the old LPs.

00:11:44: So the firm gets to hold the asset longer.

00:11:46: Maybe finish that AI integration we just talked about while still returning cash to the folks who need

00:11:50: it.

00:11:51: And Ardien is doing a lot of this, right?

00:11:53: Yeah, Ardian is actively providing these liquidity solutions to big players like Canadian pension plans.

00:11:58: It's becoming a permanent shift in the asset class

00:12:01: An NAV lending as part of that too Borrowing against the net asset value at the portfolio To manufacture payout

00:12:08: Exactly without actually selling anything.

00:12:12: But to balance the heavy news, exits do happen.

00:12:15: They just take insane patience and structural discipline.

00:12:18: Christina Bende posted about Allegro's multi-year exit via Sinvin.

00:12:22: Oh

00:12:23: right!

00:12:23: That took forever.

00:12:24: It took eight accelerated book builds?

00:12:27: Eight To finally reach a clean free float shareholder base.

00:12:30: Just piecing it out bit by bit.

00:12:32: Yep The total grind.

00:12:33: Well

00:12:33: thinking of that grind leaves me with final thought for you all over.

00:12:37: We've talked about hold periods stretching past five years.

00:12:41: We've talked about AI fundamentally altering workflow costs and engineers having to physically embed in companies.

00:12:48: Right,

00:12:49: the heavy backpack

00:12:50: Exactly!

00:12:51: If value creation now requires deep technological rewiring and complex work flow redesign with a standard three-to five year PE flip just become obsolete

00:13:02: That's a great question.

00:13:03: I mean, the very nature of PE hold periods might permanently stretch to look more like long-term industrial ownership.

00:13:09: Yeah!

00:13:09: The quick flip is dead.

00:13:11: Well if you enjoyed this episode new episodes drop every two weeks.

00:13:14: Also check out our other editions on venture capital M&A and strategy in consulting And

00:13:18: thank you so much for joining us to analyze all these.

00:13:21: Yes Thank You For Listening.

00:13:22: Make Sure To Subscribe.

00:13:23: We'll Catch You On Next Deep Dive.