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Best of LinkedIn: Private Equity: Exit Strategies CW 38/ 39 · Best of LinkedIn: Strategy, M&A & Investments

• 0:00
  Speaker 1: provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about private equity exit strategies insights in calendar weeks thirty-eight and thirty nine.
• 0:09
  Speaker 1: Freenes supports PE backed manufacturers with a market intelligence needed to unlock revenue from idle production capacity.
• 0:16
  Speaker 1: You can find more info in the description.
• 0:19
  Speaker 1: And yeah let's just jump right in.
• 0:22
  Speaker 1: There is this distinct sound running in the background of any traditional private equity deal.
• 0:27
  Speaker 0: Oh absolutely
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  Speaker 1: It's The Ticking Clock That classic five to seven year whole period.
• 0:32
  Speaker 1: Yeah,
• 0:32
  Speaker 0: exactly
• 0:33
  Speaker 1: the timer starts this second The Wire hits.
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  Speaker 1: so for today's deep dive our mission is unpacking these top private equity exit strategy trends popping up across LinkedIn right now.
• 0:43
  Speaker 0: Right because the fundamental math of traditional PD Is well it's basically breaking down
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  Speaker 1: totally breaking and we're gonna look at how the smartest players are surviving This with aggressive operational offense ruthless data readiness and permanent capital.
• 0:59
  Speaker 0: Yeah, but I mean we really have to anchor this in the macro reality first.
• 1:03
  Speaker 0: You can't even talk about exit strategies right now without acknowledging that
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  Speaker 1: is stretching fund structures to the limit.
• 1:15
  Speaker 0: Oh, for sure!
• 1:16
  Speaker 0: Just look at data Montserrat-Fermoso recently highlighted.
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  Speaker 0: there are currently uh... sixteen thousand companies sitting in portfolios that have been held over four years.
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  Speaker 0: Sixteen
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  Speaker 1: thousand?
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  Speaker 0: Yeah That represents fifty two percent of total buyout inventory.
• 1:31
  Speaker 0: globally The Avertold period has stretched out a record high six point six year now.
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  Speaker 1: I mean Mark Kuching put timeline on back long.
• 1:39
  Speaker 1: it genuinely stopped me my tracks.
• 1:42
  Speaker 1: He pointed out that if we maintain the current transaction pace, it would take eleven years just to clear that existing inventory.
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  Speaker 0: Eleven years of clearing house activity.
• 1:52
  Speaker 0: and that's assuming no new deals are added to the pile which is crazy!
• 1:55
  Speaker 0: Right... Waiting for rates drop further or multiples magically expand?
• 2:00
  Speaker 0: It's not longer a viable strategy for GPs.
• 2:02
  Speaker 0: when standard hold morphs into seven year lockup The entire conversation at LP advisory committee changes.
• 2:08
  Speaker 1: Yeah let's pause on that because If hold periods are stretching to seven years, doesn't that just fundamentally blow up the original IRR math that sponsors promise their LPs?
• 2:19
  Speaker 1: Like.
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  Speaker 1: Just from The Time Decay alone?
• 2:21
  Speaker 0: Oh it shatters the model entirely.
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  Speaker 0: Oksana A Ismailova broke this down perfectly.
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  Speaker 0: if you underwrite an asset for a year five exit targeting say twenty percent IRR And then you are forced to hold that exact same asset until your seven, clearing the exact same exit proceeds.
• 2:38
  Speaker 0: Your IRR drops to fourteen percent.
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  Speaker 0: just
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  Speaker 1: from waiting
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  Speaker 0: exactly time alone destroys the economics.
• 2:44
  Speaker 1: The numerator is static but your denominator is dragging out.
• 2:48
  Speaker 1: You're locking up LP capital for an extra two years without generating proportional new enterprise value
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  Speaker 0: and the asset itself might be perfectly healthy.
• 2:56
  Speaker 0: You know the operations or sound But the financial economics of the investment have gone completely stale.
• 3:01
  Speaker 1: But I mean, looking at the volume of continuation vehicles right now.
• 3:05
  Speaker 1: It seems like some mega funds are doing everything they can to mask this reality.
• 3:09
  Speaker 0: Oh completely
• 3:10
  Speaker 1: Swapnel.
• 3:10
  Speaker 1: John Hulukar was highlighting This.
• 3:12
  Speaker 1: Sponsors Are Taking Assets They Can't Offload The Strategics Or Other Sponsers And They're Essentially Selling Them From Their Left Pocket
• 3:20
  Speaker 0: To their Right Pocket.
• 3:21
  Speaker 0: Yeah!
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  Speaker 0: The Synthetic Exit
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  Speaker 1: Exactly.
• 3:23
  Speaker 1: You Spin Up A CV Transfer The Asset Over Grab a Fairness Opinion To Markup The Valuation and Suddenly you Declare A Liquidity Event.
• 3:31
  Speaker 0: Right, but LPs are looking at this very cynically.
• 3:34
  Speaker 0: It's a manufactured liquidity event on the spreadsheet that generates GP carry But there is no net new external cash entering the building
• 3:42
  Speaker 1: Which perfectly explains Ignacio Gallardo-Negas' observation.
• 3:46
  Speaker 1: He pointed out that DPI Distributions to Paid in Capital has utterly replaced IRR as The metric That actually matters.
• 3:55
  Speaker 0: Because you can't distribute A theoretical return rate.
• 3:58
  Speaker 1: LPs need actual cash so they can recycle it into the next vintage.
• 4:02
  Speaker 1: When DPI dries up, fundraising for the GP's Next Flagship Fund hits a brick wall.
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  Speaker 0: So if financial engineering is dead and cheap floating rate debt isn't coming back to save the MOIC.
• 4:13
  Speaker 0: sponsors are trapped.
• 4:14
  Speaker 0: They have to rely on pure operating performance.
• 4:17
  Speaker 0: Yeah
• 4:18
  Speaker 1: And before we get in do exactly how they're doing that Real quick.
• 4:22
  Speaker 1: If you're finding this breakdown useful for your own portfolio strategies, make sure to subscribe.
• 4:47
  Speaker 0: It
• 4:49
  Speaker 1: fundamentally changes the profile of the Portco CFO you need too.
• 4:53
  Speaker 1: Mark Janssen had a great analogy for this, he said if your playbook as a CFO is just holding a pair of scissors to cut travel budgets...you're a mechanic!
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  Speaker 0: And PE needs race car drivers right now?
• 5:05
  Speaker 1: Exactly!
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  Speaker 1: Cost-cutting is just a defensive posture.
• 5:08
  Speaker 1: You can't cost.
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  Speaker 1: Cut Your Way To A Three X Return…
• 5:11
  Speaker 0: You have to play offense.
• 5:13
  Speaker 1: The top CFOs are digging into pricing power.
• 5:15
  Speaker 1: To find that, two percent optimization that drops straight to the bottom line.
• 5:20
  Speaker 1: they're hyper focused on working capital velocity.
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  Speaker 0: Liberating trapped cash from inventory to fund add-on M&A without having to draw down an expensive revolver!
• 5:29
  Speaker 1: Right.
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  Speaker 0: And a massive piece of this new operational offense is AI.
• 5:33
  Speaker 0: but um...the application entirely different than the hype cycle suggests.
• 5:37
  Speaker 1: Yes, Lee McCabe pointed this out.
• 5:40
  Speaker 1: Everyone wants flashy AI-native deals but the highly reliable private equity money is actually in boring AI adoption.
• 5:48
  Speaker 0: This distinction is so critical.
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  Speaker 1: It's not about acquiring an AI startup at fifty times revenue.
• 5:54
  Speaker 1: it's about taking the dull labor heavy platforms you already own and using AI to fix workflow bottlenecks
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  Speaker 0: Right.
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  Speaker 0: Using AI inside existing EBITDA.
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  Speaker 1: Like take a residential HVAC roll up.
• 6:08
  Speaker 1: If you use AI for dynamic route optimization, your reduced truck rolls say fuel
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  Speaker 0: and increased technician utilization Yeah.
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  Speaker 1: or a health care services business.
• 6:16
  Speaker 1: using AI for clinical scheduling You are removing that cheerful spreadsheet chaos.
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  Speaker 1: That usually sits underneath these businesses.
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  Speaker 0: Mechanically if you can deploy boring AI to lift operating margins by three hundred basis points That is a highly defensible value creation lover
• 6:31
  Speaker 1: vastly superior to chasing an AI asset where the competitive moat could evaporate tomorrow and buyers are actively hunting for this capability.
• 6:39
  Speaker 0: Bobna Dewan noted that AI exposure is no longer just an upside narrative.
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  Speaker 1: It's a core component of due diligence.
• 6:46
  Speaker 0: Exactly, it dictates the multiple you pay at entry And it anchors the equity story when you exit
• 6:51
  Speaker 1: Assuming you can actually execute the exit right?
• 6:54
  Speaker 1: Because once you've run the offense... ...and that exit window finally cracks open You have to prove your value instantly to buyers
• 7:01
  Speaker 0: Which brings us to Exit Readiness.
• 7:03
  Speaker 1: Yeah which feels like buzzword that is dangerously misunderstood by most management teams.
• 7:08
  Speaker 1: They think it just means setting up a virtual data room.
• 7:11
  Speaker 0: Madea Raja put this perfectly, true exit readiness is continuous reconciliation.
• 7:16
  Speaker 0: It's not as status you achieve by scrambling for six weeks before the process kicks off
• 7:20
  Speaker 1: Right keeping the financials pristine The entire hold period because when that Data Room opens the buyers quality of earnings team Is going to rip everything apart.
• 7:29
  Speaker 0: You cannot be doing months of deferred reconciliations in one expensive block, and buyers are actively stress-testing this.
• 7:36
  Speaker 0: Jordan Nelson shared the cutthroat metric.
• 7:39
  Speaker 0: Buyers literally time how fast a company answers data question.
• 7:43
  Speaker 1: Oh I love that.
• 7:44
  Speaker 0: It's brilliant proxy for systemic risk.
• 7:46
  Speaker 1: it really is
• 7:47
  Speaker 0: If a buyer asks granular data on net revenue retention by cohort And takes your finance team six weeks backflips to answer?
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  Speaker 1: They know you had custom build that metric
• 7:58
  Speaker 0: Right But if you have it the next day, they know you actually use that number to run your business.
• 8:03
  Speaker 0: That speed directly impacts the purchase price.
• 8:05
  Speaker 1: Failing that li-fire test has catastrophic consequences.
• 8:10
  Speaker 1: Dr.
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  Speaker 1: Juergen Schneider shared a staggering real world example of this.
• 8:14
  Speaker 0: Oh!
• 8:14
  Speaker 0: This one is brutal.
• 8:16
  Speaker 1: So... It's a board meeting for a Swiss biopharma company right?
• 8:20
  Speaker 1: The lead investor asks A very straightforward liquidity question What does the cash burn buffer ratio?
• 8:27
  Speaker 1: And there are twelve people in that boardroom.
• 8:29
  Speaker 1: Five of them hold CFO titles, and they're just absolute radio
• 8:34
  Speaker 1: silence.".
• 8:35
  Speaker 0: You kidding?
• 8:36
  Speaker 0: Nobody knew the answer!
• 8:38
  Speaker 0: So the investor politely nods... ...and immediately drops the proposed exit multiple from eight X down to five
• 8:45
  Speaker 1: X. Thirty-five million dollars in enterprise value… Just evaporated on this spot Because if you cannot state your cash metrics in thirty seconds, You have a massive operational liability.
• 8:57
  Speaker 0: It signals that the underlying financial controls are fundamentally broken.
• 9:02
  Speaker 1: But I mean is data The only thing That kills multiples or Is there A human element to this too?
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  Speaker 0: Oh!
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  Speaker 0: The Human Element is arguably worse Tim Wise provided the Data on This.
• 9:11
  Speaker 0: Founder.
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  Speaker 0: dependency is the ultimate multiple killer
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  Speaker 1: because Buyers Are paying for the transferability of the Revenue.
• 9:18
  Speaker 1: What can the business do without the founder In the building?
• 9:21
  Speaker 0: Exactly.
• 9:22
  Speaker 0: If the founder is chief problem solver and main rainmaker, that dependency mechanically pulls down the exit multiple by three to four turns of EBITDA.
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  Speaker 1: Wow!
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  Speaker 1: Three-to-four turns?
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  Speaker 1: On a three million dollar EBITTA business... That's nine to twelve million dollars walking out door.
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  Speaker 0: Simply because value isn't transferable….
• 9:40
  Speaker 0: So looking at whole picture – Standard hold period stretching seven years IRR decaying CV exits Intense exit readiness pressure.
• 9:48
  Speaker 0: The machinery is punishing everyone,
• 9:51
  Speaker 1: which naturally leads to capital routing around the problem.
• 9:55
  Speaker 1: We are seeing a major trend toward alternative paths to liquidity basically escaping the traditional private equity clock entirely.
• 10:03
  Speaker 0: Keith Richmond highlighted a fascinating transaction on this sequence holdings and Michael Dell's family office bought Baldwin group for seven point seven billion dollars.
• 10:11
  Speaker 0: but they used permanent capital.
• 10:13
  Speaker 1: I mean, I have a hard time believing LPs wouldn't want the discipline of traditional fund structure on a seven point seven billion dollar deal.
• 10:21
  Speaker 0: Right but when you look at this strategy it makes perfect sense.
• 10:24
  Speaker 0: The reason they require permanent capital goes back to what we said about AI.
• 10:27
  Speaker 0: Real technological transformation is incredibly messy.
• 10:31
  Speaker 1: You have rewrite workflows retrain thousands people J curve is severe
• 10:36
  Speaker 0: And payoff very likely land well outside constraints standard five year.
• 10:41
  Speaker 0: hold
• 10:42
  Speaker 1: Traditional PEs like house flipping, right?
• 10:44
  Speaker 1: You're always stressed about the timeline and market at that exact moment of sale.
• 10:48
  Speaker 1: Permanent capital is buying a generational estate.
• 10:52
  Speaker 0: You can tear it down to studs because you never have move.
• 10:57
  Speaker 1: You compound enterprise value without an exit clock running out.
• 11:00
  Speaker 1: Nicola Ebbmeyer noted very similar strategy playing with bending spoons.
• 11:05
  Speaker 0: Right, they acquire cash-rich tech companies with stagnant growth.
• 11:08
  Speaker 0: They heavily optimize them and just hold them forever—they have zero intention of ever flipping
• 11:13
  Speaker 0: them.".
• 11:13
  Speaker 1: And founders are catching onto these alternative structures too!
• 11:16
  Speaker 1: Michael Chason pointed out the massive rise in independent buyouts or IBOs.
• 11:21
  Speaker 0: In an IBO, founders use exact same leverage that PE firms used to create liquidity but don't hand over majority control
• 11:28
  Speaker 1: Because The Dirty Secret Of PE Buyouts That Founders Are Waking Up To Is The Earn Out Failure Rate.
• 11:34
  Speaker 1: On average, only twenty-one percent of the promised earn out actually gets paid.
• 11:39
  Speaker 0: The headline valuation looks incredible but back end economics rarely materialize.
• 11:44
  Speaker 0: IBOs allow the founder to take chips off table today while staying in driver's seat.
• 11:49
  Speaker 1: If we pull all these moving pieces together... We arrive at a genuinely provocative realization There is over a trillion dollars in private equity dry powder sitting on sidelines that GPs are structurally required
• 12:03
  Speaker 0: But simultaneously hold.
• 12:05
  Speaker 0: periods have blown out past six years zero interest rate debt is gone and multiple expansion Is dead, right?
• 12:12
  Speaker 0: So the question we have to leave you with today.
• 12:14
  Speaker 0: It's this as We enter an era that requires deep long-term technological transformations To generate real value is The classic five two seven year PE fund structure actually becoming an outdated financial product?
• 12:28
  Speaker 1: Yep it all comes back to the clock.
• 12:30
  Speaker 1: The smartest players aren't trying to beat the timer anymore, they're just unplugging it.
• 12:36
  Speaker 1: If you enjoyed this episode new episodes drop every two weeks.
• 12:39
  Speaker 1: Also check out our other additions on PE value creation private equity fundraising venture capital M&A and strategy in consulting.
• 12:47
  Speaker 1: Thanks for joining us on this deep dive And remember to subscribe so you never miss an addition.