Latest / Best of LinkedIn: Strategy, M&A & Investments / Best of LinkedIn: Private Equity Insights CW 20/ 21

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Best of LinkedIn: Private Equity Insights CW 20/ 21 · Best of LinkedIn: Strategy, M&A & Investments

• 0:00
  Speaker 0: provided by Thomas Allgaier and Frennus.
• 0:02
  Speaker 0: Based on the most relevant LinkedIn posts about private equity in CW TwentyandTwentyOne, Frennis supports PE-backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.
• 0:14
  Speaker 0: You can find more info in description.
• 0:16
  Speaker 1: This edition is brought you our partner Informa.
• 0:19
  Speaker 1: Don't miss out their upcoming conference Super Return International.
• 0:23
  Speaker 1: Find link of the Conference In Description.
• 0:25
  Speaker 0: So imagine sitting like a three trillion dollar pile of assets that you literally just cannot sell.
• 0:32
  Speaker 1: Wow, yeah That's-that's a lot of locked up capital
• 0:34
  Speaker 0: right?
• 0:35
  Speaker 0: You own them.
• 0:35
  Speaker 0: the clock is ticking.
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  Speaker 0: your investors are basically banging on the door asking where their returns Are and the buyers have just they vanished poof gone exactly.
• 0:44
  Speaker 0: And that is the macro reality that's dictating pretty much everything in private equity right now.
• 0:49
  Speaker 0: So welcome to the deep dive today.
• 0:50
  Speaker 0: We're bypassing all the fluff To really figure out how general partners are surviving.
• 0:55
  Speaker 0: what is basically?
• 0:55
  Speaker 0: The great exit jam of twenty-twenty six, right
• 0:58
  Speaker 1: yeah And we're pulling them.
• 0:59
  Speaker 1: most relevant trends we've seen across LinkedIn from calendar weeks Twenty and twenty one.
• 1:06
  Speaker 1: so we're looking at conversations driven by the practitioners who were you know actually in the trenches doing the work
• 1:12
  Speaker 0: exactly no over explaining just the critical takeaways for those of you working in M&A, PEVC or consulting.
• 1:19
  Speaker 0: So to really understand the strategies they're using whether that's like deploying AI Or completely changing how their source deals We kind have to start with a three trillion dollar number.
• 1:30
  Speaker 1: Yeah let's visualize How we actually got here.
• 1:32
  Speaker 1: because John Clark had this Really great analogy circulating recently.
• 1:36
  Speaker 1: He said The traditional private equity model is essentially A financial escalator.
• 1:40
  Speaker 1: Oh
• 1:40
  Speaker 0: I liked it an escalator.
• 1:41
  Speaker 1: Right, so you buy a founder-owned business at say five times earnings?
• 1:45
  Speaker 1: You step onto that first stair...you optimize it build into national platform and then you step off selling to larger fund for like sixteen time
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  Speaker 0: earnings!
• 1:54
  Speaker 0: And I assume the larger funds just steps on their own escalators doing exact same thing.
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  Speaker 1: Exactly, it's this continuous ride of increasing valuations.
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  Speaker 1: but right now somebody basically hit the emergency stop button.
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  Speaker 1: The escalator is completely jammed.
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  Speaker 0: Yeah It just frozen.
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  Speaker 0: I mean David Hermeyer pulled some hard data from a recent Wall Street Journal report on this and that three trillion dollar pile-up of unsold investments globally That equates to nearly thirty-three thousand companies just sitting there completely frozen in portfolios.
• 2:28
  Speaker 0: Thirty
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  Speaker 1: three thousand, that is insane!
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  Speaker 1: And the European market is feeling this acutely too.
• 2:34
  Speaker 1: I was looking at some analysis by Jan Riesek and he noted that forty seven percent of european PE exits scheduled for twenty twenty five were just postponed.
• 2:42
  Speaker 1: Forty
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  Speaker 0: seven percent
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  Speaker 1: yeah Almost half, so we're looking at the second consecutive year where roughly half of all planned exits just failed to launch.
• 2:49
  Speaker 0: Okay wait let me play devil's advocate here for a second.
• 2:52
  Speaker 0: why is that inherently a crisis?
• 2:53
  Speaker 0: I mean if you own a good company Why can't she just hold the asset indefinitely until market improves?
• 2:59
  Speaker 1: Well because how private equity funds are structured right.
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  Speaker 1: These vehicles have very strict timelines usually seven to ten years and more importantly the LPs, The institutions actually providing the capital.
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  Speaker 1: they need liquidity.
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  Speaker 0: They have payouts to make
• 3:12
  Speaker 1: exactly!
• 3:13
  Speaker 1: They look at DPI which is distributions To paid in capital.
• 3:16
  Speaker 1: it's the actual physical cash return to them.
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  Speaker 1: And right now dpi Is hitting record lows.
• 3:23
  Speaker 1: you basically can't Pay pensions with paper valuations makes
• 3:27
  Speaker 0: total sense.
• 3:28
  Speaker 0: so if the window is closed an lps are screaming for cash.
• 3:32
  Speaker 0: What are GPs actually doing to survive like without taking a massive haircut on the forced sale?
• 3:37
  Speaker 1: Well, this is where Jan Ratek offered A really tactical work around.
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  Speaker 1: that's gaining a lot of traction in Europe.
• 3:42
  Speaker 1: right now firms Are Actually Utilizing EIB so European Investment Bank Venture debt.
• 3:47
  Speaker 0: Oh interesting venture debt for PE.
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  Speaker 1: Yeah The eib recently committed seventy-five billion euros specifically for clean energy strategies.
• 3:56
  Speaker 1: So by securing this debt facility, a company can extend its runway by twenty four to thirty six months.
• 4:01
  Speaker 0: Okay so they're taking on more debt to bridge the gap.
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  Speaker 0: but why venture debts?
• 4:05
  Speaker 0: Specifically like Why not just go out and raise more equity?
• 4:09
  Speaker 0: because
• 4:09
  Speaker 1: raising equity right now means resetting The cap table.
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  Speaker 1: you'd be diluting the existing ownership percentages at A really depressed valuation.
• 4:16
  Speaker 1: ah
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  Speaker 0: Right That makes sense.
• 4:18
  Speaker 1: Yeah, so VentureDec gives you the cash to survive this soft buyer market without giving up that precious equity.
• 4:25
  Speaker 1: but and there's a massive catch here.
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  Speaker 1: Retznick points out The Diligence Timeline for EIB debt is incredibly rigorous.
• 4:33
  Speaker 0: So can't just use it as quick fix?
• 4:35
  Speaker 1: No not at all.
• 4:36
  Speaker 1: You cannot Use It As A Ninety Day Emergency Bridge!
• 4:38
  Speaker 1: You really have To Start That Conversation Like Full Year In Advance.
• 4:42
  Speaker 0: Wow Okay And what are you supposed Do With That Extra Runway Once You Have It?
• 4:46
  Speaker 0: Wayne Marhelski argued something pretty definitive on LinkedIn last week about this.
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  Speaker 1: What did he say?
• 4:51
  Speaker 0: He basically said that for the last decade, you didn't even really have to be a great operator.
• 4:56
  Speaker 0: You could just rely on multiple expansions Buying low waiting for market naturally heat up and then selling high
• 5:04
  Speaker 1: Or hoping for massive rate cuts.
• 5:06
  Speaker 1: so borrowing gets cheap again?
• 5:08
  Speaker 0: Exactly.
• 5:09
  Speaker 0: But marhelsky says those days are completely dead.
• 5:13
  Speaker 0: Operating performance not rates not multiples.
• 5:16
  Speaker 0: operating performance is now the absolute only key to unlocking a deal.
• 5:21
  Speaker 1: Which kind of forces very uncomfortable question onto the table, right?
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  Speaker 1: Are these portfolio companies actually ready to be scrutinized by a buyer in this kind of market?
• 5:29
  Speaker 0: Yeah, and the data says absolutely not.
• 5:32
  Speaker 0: It's actually kinda wild!
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  Speaker 0: Chloe Ridley cited EYData showing that seventy-two percent of PE exits suffer from weak KPI reporting.
• 5:40
  Speaker 1: Seventy two per cent?
• 5:42
  Speaker 0: And this blows my mind.
• 5:43
  Speaker 0: honestly these are companies owned by highly sophisticated financial sponsors.
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  Speaker 0: How on earth their key performance indicators amess?
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  Speaker 1: Well I mean it is because they've historically treated exit readiness as frantic, like ninety-day sprint just before a sale rather than day one operating system.
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  Speaker 0: Totally!
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  Speaker 0: Just scrambling at the end...
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  Speaker 1: Right and Eiffelt Karp highlighted a massive disconnect from recent accordion survey on this exact dynamic.
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  Speaker 1: so ninety seven percent of sponsors say they want an always exit ready CFO in their portfolio companies.
• 6:13
  Speaker 0: Okay sure who wouldn't?
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  Speaker 1: Exactly but only twenty percent of those CFOs actually operate that way.
• 6:19
  Speaker 0: Wow Just twenty percent.
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  Speaker 0: I can visualize exactly how this plays out, you know.
• 6:24
  Speaker 0: and LOI a letter of intent arise from a buyer And suddenly the CFO is sweating having to pull data From some outdated ERP system cross-reference it with a messy Salesforce database and shocker The numbers don't match
• 6:38
  Speaker 1: Yeah, and the second a buyer finds discrepancies in their revenue data during due diligence.
• 6:43
  Speaker 1: Management's credibility is just... it's destroyed.
• 6:45
  Speaker 0: Yeah, blood on water!
• 6:46
  Speaker 1: Exactly That when the buyer introduces earn-out language meaning that seller only gets paid if future targets are met or they drop valuation entirely.
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  Speaker 1: Crop actually noted that rushed disorganized exit process can reduce final valuation by one to three full turns of EBITDA
• 7:01
  Speaker 0: Which was just catastrophic loss value.
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  Speaker 0: And honestly, it really exposes the broader structural issue Brian Spear was talking about regarding IRR.
• 7:09
  Speaker 0: You know internal rate of return?
• 7:11
  Speaker 0: Oh
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  Speaker 1: yeah!
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  Speaker 1: The obsession with IRR
• 7:13
  Speaker 0: right.
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  Speaker 0: for years...the industry relied on IRR as the ultimate metric mostly because it can be heavily manipulated by financial engineering and like optimistic paper markups.
• 7:24
  Speaker 0: but IRR just cracks under the pressure of an extended hold period.
• 7:27
  Speaker 1: It really does.
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  Speaker 1: you can't financially engineer your way out this kind of jam.
• 7:32
  Speaker 1: You need durable audited cash flow.
• 7:35
  Speaker 0: So if operational performance and pristine data are literally the only ways to drive that cashflow, I think it explains exactly why the industry is suddenly pivoting so aggressively toward AI?
• 7:46
  Speaker 1: Oh absolutely they're looking for a silver bullet to fix all these inefficiencies?
• 7:49
  Speaker 0: Right but Is It A Silver Bullet or just like a fundraising gimmick because Lima Cabe shared?
• 7:55
  Speaker 0: that is wildly provocative.
• 7:57
  Speaker 0: He pointed out, private equity is essentially paying open AI a guaranteed seventeen point five percent return through this new ten billion dollar vehicle called the deployment company.
• 8:08
  Speaker 0: Wait,
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  Speaker 1: seventeen point five percent and that's the vehicle anchored by the massive players right?
• 8:13
  Speaker 1: Like TBG Brookfield Advent Bain Capital alongside what fifteen other investors.
• 8:17
  Speaker 0: Yeah exactly those guys.
• 8:18
  Speaker 0: yeah.
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  Speaker 0: so just think about the mechanics of this for a second.
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  Speaker 0: these mega funds are paying an external vendor to embed engineers into their portfolio companies To execute the exact AI value creation strategies.
• 8:31
  Speaker 0: they literally promised their LPs They could do in-house.
• 8:35
  Speaker 0: Wow.
• 8:36
  Speaker 0: Yeah, McCabe calls it value creation theater and It makes you wonder are we just slapping an AI inside sticker?
• 8:43
  Speaker 0: on a twenty fifteen operational playbook.
• 8:46
  Speaker 1: That is very real risk.
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  Speaker 1: and Carson W kind of echoed the sentiment warning about the superficial adoption these tools.
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  Speaker 1: what he's seeing?
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  Speaker 1: his portfolio companies buying AI software setting up the shiny dashboards to track usage metrics but fundamentally failing to rethink their actual workflows.
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  Speaker 0: oh so just bolting it on.
• 9:02
  Speaker 0: yeah
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  Speaker 1: if you just bolt an AI tool onto broken legacy workflow without redesigning that work flow around your investment pieces, your EBITDA does not budge one inch.
• 9:10
  Speaker 0: It's like buying engine in Ferrari but you know, keeping it in the trunk of a Honda Civic and expecting the car to go faster.
• 9:17
  Speaker 0: It just doesn't work if its not integrated.
• 9:19
  Speaker 0: That's
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  Speaker 1: great way put it.
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  Speaker 0: So who is actually supposed be integrating?
• 9:22
  Speaker 0: Yeah Because Clark Arbeger pointed out this fascinating structural tension happening inside these funds.
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  Speaker 0: You have PE firms trying to centralize AI capabilities at top like at fund level But they are consistently losing our portfolio companies where CEO driving hyper specific road
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  Speaker 1: map.
• 9:42
  Speaker 1: Well the underlying logic there is crucial, right?
• 9:45
  Speaker 1: You can centralize that capability.
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  Speaker 1: Like you could hire brilliant expensive AI talent at a fund level to act as resource but absolutely cannot centralize this agenda.
• 9:54
  Speaker 1: Right!
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  Speaker 0: The Portco has to want
• 9:55
  Speaker 1: it Exactly.
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  Speaker 1: A top-down disaggregated AI transformation pushed by a GP Is just too slow and faces massive cultural friction.
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  Speaker 1: At the Portco Level Funds are compounding returns.
• 10:06
  Speaker 1: the fastest right now Are the ones where the Portcos CEO really owns the AI agenda and The Fund merely supports them with capital.
• 10:12
  Speaker 0: Okay, let's ground this a bit.
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  Speaker 0: where is AI actually working right now?
• 10:17
  Speaker 0: today without the theater?
• 10:19
  Speaker 1: It's working incredibly well in the grant work.
• 10:21
  Speaker 1: honestly Declan Goldrick pointed out that tools like Deal Scout are automating the eighty percent of an analyst job That it just pure data extraction.
• 10:30
  Speaker 0: Oh wow!
• 10:30
  Speaker 0: Eighty percent.
• 10:31
  Speaker 0: Yeah
• 10:31
  Speaker 1: we're talking about reading A CIM the Confidential Information Memorandum, a seller provides extracting raw financials normalizing EBITDA and formatting IC or Investment Committee memo.
• 10:44
  Speaker 0: Okay that makes total sense!
• 10:45
  Speaker 0: That's data processing not high-level judgment.
• 10:48
  Speaker 0: so if you automate the extraction free up the analyst to actually use their brain on whether they deal with sound
• 10:54
  Speaker 1: Precisely.
• 10:55
  Speaker 1: And we're seeing this exact same leap in due diligence.
• 10:58
  Speaker 1: David Boyardy highlighted how AI is completely transforming technical DD.
• 11:03
  Speaker 1: Historically, having humans manually audit the code base of a software company you want to buy is expensive.
• 11:08
  Speaker 1: It's slow and it's highly prone.
• 11:12
  Speaker 1: But now AI augmented systems are processing million line code bases literally overnight.
• 11:18
  Speaker 1: They scan for security vulnerabilities, hard coded passwords all of it and they're doing at a seventy percent lower cost.
• 11:24
  Speaker 0: Okay wait I have to push back on that little bit.
• 11:26
  Speaker 0: We all know large language model solution.
• 11:29
  Speaker 0: if you haven't AI scanning a million lines of code For open source license violations or massive security flaws aren't you terrified?
• 11:36
  Speaker 0: It's going too like confidently hallucinate that the code is clean when it's actually a complete legal minefield.
• 11:43
  Speaker 1: Well, that's exactly why Paul Press' research was so sobering.
• 11:47
  Speaker 1: he analyzed data and analytics functions inside top-tier PE firms And realized private equity doesn't have an data science problem.
• 11:55
  Speaker 1: It has a data engineering
• 11:56
  Speaker 0: problems Unpacked for me.
• 11:58
  Speaker 0: What's the difference in this context?
• 12:00
  Speaker 1: So a data scientist builds advanced AI models and algorithms But a data engineer builds plumbing
• 12:06
  Speaker 0: The plumbing
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  Speaker 1: Right.
• 12:07
  Speaker 1: The pipelines, the data warehouses... ...the clean data flows that actually feed those models.
• 12:12
  Speaker 1: Press found in successful setups Data engineers outnumber scientists to point five-to one.
• 12:18
  Speaker 1: Yeah!
• 12:19
  Speaker 1: If your data isn't perfectly structured Clean and governed Your AI will absolutely hallucinate.
• 12:25
  Speaker 1: You simply cannot run advanced portfolio analytics without the plumbing
• 12:29
  Speaker 0: And you definitely can't build the plumbing without the right people.
• 12:31
  Speaker 0: Yeah, which kind of forces us to look at the human element here Right?
• 12:35
  Speaker 0: The bottleneck to fixing these companies isn't technology It's the leadership talent.
• 12:39
  Speaker 0: Oh
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  Speaker 1: a hundred percent
• 12:40
  Speaker 0: yeah.
• 12:41
  Speaker 0: Christopher J. Condy shared some really eye-opening numbers on this operational talent gap.
• 12:46
  Speaker 0: Across the ten largest firms only ten percent of senior personnel sit in operational value creation roles.
• 12:53
  Speaker 1: wait Only ten percent
• 12:54
  Speaker 0: Compared to fifty-six percent who are in investment
• 12:57
  Speaker 1: roles.
• 12:57
  Speaker 1: Well, I mean that just reflects the old era of private equity doesn't it?
• 13:00
  Speaker 1: PE was structurally built to reward deal origination and financial engineering.
• 13:05
  Speaker 1: The glory.
• 13:06
  Speaker 1: And you know the lion's share of the carried interest went to the deal teams Who actually bought and sold the companies
• 13:13
  Speaker 0: exactly.
• 13:14
  Speaker 0: but Conti argues that to reach parity which is basically the new standard for top performing funds That operational headcount literally needs to triple Because as we established earlier, the transaction alone just doesn't drive returns anymore.
• 13:28
  Speaker 0: The operators are the ones having to roll up their sleeves fix the reporting implement the AI and effectively save the Returns.
• 13:34
  Speaker 0: but hiring
• 13:35
  Speaker 1: those operators is notoriously difficult particularly at the C-suite level.
• 13:39
  Speaker 1: Dan Krimman's actually laid out a brilliant list of CEO Hiring mistakes in PE backed companies And you know what?
• 13:45
  Speaker 1: The number one trap is What's
• 13:47
  Speaker 0: that
• 13:47
  Speaker 1: overvaluing charisma?
• 13:49
  Speaker 0: Oh really But wait isn't being a CEO fundamentally a sales job?
• 13:53
  Speaker 0: In a way, like you have to sell the vision of employees and board customers.
• 13:57
  Speaker 0: Why is Charisma attractive?
• 13:59
  Speaker 1: Because Charm does not predict operational execution.
• 14:02
  Speaker 1: A highly charismatic CEO who maybe crushed it in slow-moving cash rich corporate environment might completely fracture under compressed high stakes timeline of private equity hold period.
• 14:13
  Speaker 1: That
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  Speaker 0: makes alot sense.
• 14:14
  Speaker 1: Yeah Cremons argues that sponsors frequently ignore their own instincts during interviews because they are just blinded by candidates.
• 14:21
  Speaker 0: polish Interesting, and you know the criteria for technical leaders is just as ruthless.
• 14:26
  Speaker 0: Yeah David Mackie argued that to land a PE chief technology officer role.
• 14:31
  Speaker 0: board credibility matters exponentially more than technical credibility.
• 14:36
  Speaker 1: Board credibility over technical
• 14:38
  Speaker 0: yeah which sounds kind of counterintuitive.
• 14:40
  Speaker 0: until you unpack it Technical excellence basically just gets your resume on the shortlist.
• 14:45
  Speaker 0: The real test is Can you hold a room full of aggressive investors?
• 14:50
  Speaker 0: Can you translate your technical roadmap into actual EBITDA outcomes.
• 14:54
  Speaker 1: Oh, I see
• 14:55
  Speaker 0: right like if a PE partner pushes back on your budget can you defend it without torturing the entire relationship?
• 15:00
  Speaker 1: exactly they are probing for commercial acumen not just your coding ability and You know when port goes.
• 15:06
  Speaker 1: don't have that talent in place And things stall.
• 15:08
  Speaker 1: time becomes The ultimate enemy.
• 15:10
  Speaker 1: time
• 15:10
  Speaker 0: is money literally
• 15:11
  Speaker 1: Literally, and that's why we're seeing such a surge in interim leadership.
• 15:15
  Speaker 1: Jack Seyer had had great point on this.
• 15:17
  Speaker 1: the true value of bringing an experienced Interim Transformation leader isn't possess all the answers on day one, it's that they drastically cut discovery time.
• 15:27
  Speaker 0: Right because they recognize The patterns of dysfunction immediately.
• 15:31
  Speaker 0: They've seen them fifty times before.
• 15:33
  Speaker 0: so they stop the organization from wasting six months just trying to diagnose the disease.
• 15:38
  Speaker 1: Yes Time is literally the most expensive asset during a whole period.
• 15:42
  Speaker 1: Alan Gonsonhauser stressed this specifically for the go-to market function.
• 15:46
  Speaker 1: He argues that a structured, ninety-minute alignment conversation between the CEO and new chief marketing officer in Week One literally drawing up one page contract of expectations.
• 15:57
  Speaker 1: that alone prevents nine months of strategic disaster down the
• 16:00
  Speaker 0: line.
• 16:01
  Speaker 0: Wow!
• 16:01
  Speaker 0: Ninety minutes to save nine months?
• 16:03
  Speaker 0: It really all comes into intentionality over Ego.
• 16:06
  Speaker 0: Lucas Ponbow wrapped this whole talent theme by noting and high curiosity.
• 16:15
  Speaker 1: I love that low ego, high-curiosity
• 16:17
  Speaker 0: right?
• 16:18
  Speaker 0: They don't walk in trying to play the lone hero.
• 16:20
  Speaker 0: they actively team up with external advisors and operating partners To really pressure test their thinking.
• 16:26
  Speaker 0: And
• 16:27
  Speaker 1: you know That scrappy collaborative approach is a perfect bridge to how The lower middle market Is operating Right now because while the massive mega platforms are bogged down Exit, Jim.
• 16:37
  Speaker 1: We talked about the real creative dealmaking is happening downstream particularly in how deals are actually being sourced.
• 16:44
  Speaker 0: Yeah The Origination Playbook Is Fundamentally Shifting.
• 16:48
  Speaker 0: Adam Stalmack brought up a great point.
• 16:50
  Speaker 0: private equity firms don't Actually Have A Deal Flow Problem.
• 16:53
  Speaker 0: they have a visibility problem.
• 16:55
  Speaker 1: A visibility problem,
• 16:56
  Speaker 0: yeah if your sourcing strategy relies on filtering broad industry codes and blasting outdated email lists you're just going to end up in the exact same crowded auction processes as every other fund out there
• 17:07
  Speaker 1: And You will absolutely overpay.
• 17:09
  Speaker 1: Matthew Lones provided perfect case study of how to bypass those auctions.
• 17:13
  Speaker 1: he completely stopped cold e-mailing founders because let's be honest Founders delete those emails immediately.
• 17:19
  Speaker 1: Oh
• 17:19
  Speaker 0: instantly!
• 17:20
  Speaker 0: Stam folder
• 17:21
  Speaker 1: Right.
• 17:21
  Speaker 1: Instead, he built an inbound content engine on LinkedIn.
• 17:25
  Speaker 1: He started talking publicly about real-deal mechanics true valuation numbers and the psychology of buyer behavior
• 17:33
  Speaker 0: And the results.
• 17:33
  Speaker 0: that strategy were wild?
• 17:35
  Speaker 0: He generated forty seven inbound conversations with founders and signed eight mandates In just ninety days.
• 17:42
  Speaker 0: Wow zero cold emails.
• 17:45
  Speaker 0: The founders recognize their own struggles in his content and just reached out to him directly.
• 17:50
  Speaker 0: That is how you solve the visibility problem.
• 17:52
  Speaker 0: that's
• 17:52
  Speaker 1: brilliant.
• 17:52
  Speaker 1: And the players who are capitalizing most on these proprietary lower middle market deals right now our independent sponsors John Keppel notes, they're absolutely dominating the ten million to seventy five million dollar enterprise value space Right Now.
• 18:05
  Speaker 1: These Are Usually Founder Owned Businesses That Are Just Right for Professionalization.
• 18:08
  Speaker 1: But
• 18:09
  Speaker 0: Looking at the economics Here I Have To Ask How They Even Compete.
• 18:12
  Speaker 0: A traditional private equity fund has a massive management fee to pay for a fully staffed deal team, which Nicholas James pointed out costs roughly one-to-one point five million dollars a year.
• 18:24
  Speaker 0: Independent sponsors don't have a committed fund.
• 18:26
  Speaker 0: they raise capital on the Deal by Deal basis.
• 18:29
  Speaker 0: so how do they afford to operate?
• 18:31
  Speaker 1: Well...they survive being ruthlessly lean!
• 18:34
  Speaker 1: James broke down their math actually First.. They prioritize value over volume.
• 18:38
  Speaker 1: So a senior partner might only two or three deals.
• 18:41
  Speaker 1: Second, they lean heavily into the creative AI workflows we discussed earlier to kind of punch above their weight on diligence.
• 18:48
  Speaker 0: Right, automating the grunt work?
• 18:49
  Speaker 1: Exactly!
• 18:50
  Speaker 1: But most importantly – They structure deals as deep partnerships with sellers.
• 18:56
  Speaker 0: So instead buying the founder out completely…they roll over founders' equity and keep them in as an operating partner.
• 19:02
  Speaker 1: It effectively turns the seller a built-in executive which saves independent sponsors from having to go out and recruit expensive new C-Suite.
• 19:10
  Speaker 1: It's a highly efficient model and they are targeting incredibly specific fragmented niches.
• 19:16
  Speaker 0: Like what kind of niches?
• 19:17
  Speaker 0: Well,
• 19:17
  Speaker 1: Kristoff taught her Sheridae is staggering statistic on this.
• 19:21
  Speaker 1: right now there are twenty seven different PE backed platforms actively buying up US HVAC businesses with
• 19:29
  Speaker 0: HPAC like heating an air conditioning yep.
• 19:32
  Speaker 1: but if you ask local HVIC owners They can usually only name two of them.
• 19:38
  Speaker 0: That is a massive, invisible wave of capital just aggressively rolling up a fragmented industry.
• 19:45
  Speaker 1: And the economic engine driving this entire roll-up frenzy.
• 19:50
  Speaker 1: Chris Riley provided a great breakdown of how this works in the financial models, and it really explains why everyone is chasing these local service businesses.
• 19:57
  Speaker 1: Okay
• 19:58
  Speaker 0: let me see if I can translate this because multiple arbitrage always sounds way more complex than it actually.
• 20:08
  Speaker 0: You knock down the fences, zone it as part of a brand new luxury apartment complex you already own next door and suddenly the dirt that small house sits on is worth twice as much simply because its now part of larger premium plot.
• 20:26
  Speaker 1: That's perfect analogy!
• 20:28
  Speaker 1: In PE terms, if a sponsor buys small standalone HVAC business for let's say four times its EBITDA and then instantly folds it into their massive national platform company which the market already values at eight times EBITTA they have instantly doubled value of that newly acquired cash flow.
• 20:47
  Speaker 1: Wow.
• 20:47
  Speaker 1: Yeah, they haven't even changed a single operational thing yet but the multiple arbitrage created immediate equity value.
• 20:54
  Speaker 0: It's the absolute cornerstone of the buy and build strategy.
• 20:57
  Speaker 0: it really is.
• 20:58
  Speaker 0: But you know as we zoom out to our final theme We really have to recognize that these micro strategies don't exist in a vacuum.
• 21:03
  Speaker 0: The macro headwinds and regulatory realities are shifting the ground underneath pretty much everything we've discussed today.
• 21:09
  Speaker 1: Oh, the ground is definitely shifting particularly in the credit markets.
• 21:13
  Speaker 1: Anton Vinsky raised a massive red flag.
• 21:16
  Speaker 1: while everyone has been worrying about stress and private credit market Vince warns that there real casualties are actually going to be on the private equity side.
• 21:24
  Speaker 0: how so
• 21:25
  Speaker 1: well For portfolio companies approaching maturity walls, meaning their debt comes due in twenty-twenty six and twenty twenty seven refinancing at par is becoming virtually impossible.
• 21:36
  Speaker 0: Okay let's quickly define refinancing a par for everyone.
• 21:40
  Speaker 0: that basically means trying to get a new loan
• 21:45
  Speaker 1: Correct, but because interest rates are higher now and spread widening has occurred meaning lenders are demanding a higher premium for risk the debt service costs are just too high for the company's cash flow to support.
• 21:57
  Speaker 1: The
• 21:57
  Speaker 0: math just breaks!
• 21:58
  Speaker 1: The math simply breaks.
• 21:59
  Speaker 1: sponsors are going to face a brutal ultimatum either write a massive new equity check from the fund to pay down the debt or hand Vinsky predicts a wave of restructurings where the PE equity gets completely wiped out while credit funds recover most their money.
• 22:17
  Speaker 0: That is a chilling prospect for funds that deployed heavily at the absolute peak in market in twenty-twenty one, and you know on top of this credit stress regulatory landscape tightening its grip too!
• 22:29
  Speaker 0: Dr.
• 22:29
  Speaker 0: Andreas Driver pointed out that German and EU foreign direct investment or FDI reforms are converging mid-twenties.
• 22:37
  Speaker 1: the FDI screening?
• 22:38
  Speaker 0: Yeah.
• 22:39
  Speaker 0: And for anyone unfamiliar, FDI Screening is basically when a government reviews and potentially blocks a foreign investment for national security reasons...
• 22:47
  Speaker 1: ...and this convergence not just some minor compliance update it fundamentally redefines what foreign even means The screening will now be based on nationality rather than just the place of residence or incorporation.
• 22:59
  Speaker 0: Oh wow that's huge shift
• 23:00
  Speaker 1: It is!
• 23:01
  Speaker 1: And crucially limited partners no longer get a blanket exemption.
• 23:05
  Speaker 1: Historically, if an LP was just a passive financial investor regulators pretty much ignored them.
• 23:10
  Speaker 1: That safe harbor is totally gone If the GPLP structure or consent rights grant them any strategic influence at all.
• 23:16
  Speaker 0: So it's not an afterthought anymore
• 23:18
  Speaker 1: Exactly!
• 23:19
  Speaker 1: Driver emphasizes that FDI must now be a primary deal design parameter from day one Not some procedural box you check right before closing
• 23:28
  Speaker 0: Man... so..if exits are jammed credit is incredibly tight and regulators are heavily scrutinizing cross-border deals.
• 23:37
  Speaker 0: Where is the smart money actually flowing right now?
• 23:40
  Speaker 1: It's flowing heavily into infrastructure!
• 23:42
  Speaker 1: Dr.
• 23:43
  Speaker 1: Ralph U. Bronnengoll highlighted data centers as one of defining structural themes this decade.
• 23:48
  Speaker 1: Driven by massive explosion in cloud demand, global data center investments are expected to double hitting around two hundred fifteen billion euros annually.
• 23:59
  Speaker 0: But surely that's an incredibly bottlenecked play.
• 24:02
  Speaker 0: I mean, we keep hearing the physical power grade is at its absolute limit.
• 24:06
  Speaker 0: Where is energy coming from?
• 24:07
  Speaker 1: Well That Is Exactly The Constraint!
• 24:09
  Speaker 1: The challenge isn't finding demand for data center.
• 24:12
  Speaker 1: It's securing energy availability Navigating grid connections and complying with local ESG regulations.
• 24:18
  Speaker 1: Investors really have to figure out exactly where they want to insert themselves along a highly complex capital intensive value chain
• 24:25
  Speaker 0: Makes sense.
• 24:26
  Speaker 0: And on the complete opposite end of spectrum looking at incredibly niche markets, Stefan Steinhardt pointed out Montague's acquisition of the certification body DQS.
• 24:36
  Speaker 0: This really signals that private equity is now targeting But he raises a massive red flag regarding cultural risk.
• 24:47
  Speaker 1: Yeah, it is a profound culture clash.
• 24:49
  Speaker 1: think about what DQS Is?
• 24:51
  Speaker 1: It was built by standards institutions to serve technical integrity not shareholder return targets.
• 24:57
  Speaker 1: right in a traditional manufacturing buyout you can You know aggressively cut headcount to protect your EBITDA margins but in a certification business The expert auditors are the product.
• 25:08
  Speaker 0: Exactly, yeah If you push financial targets too hard and those highly qualified lead auditors feel their integrity is being compromised They just walk out.
• 25:16
  Speaker 0: And if they leave you lose your accreditation Your clients trust you less and the revenue completely evaporates.
• 25:22
  Speaker 0: Steinhardt warns that integrating culture commercially without destroying the very credibility you just purchased is an integration risk.
• 25:28
  Speaker 0: almost never shows up accurately in a financial model.
• 25:31
  Speaker 1: No, it requires a level of operational nuance that traditional financial engineering simply cannot
• 25:36
  Speaker 0: fake!
• 25:37
  Speaker 0: Absolutely Okay.
• 25:39
  Speaker 0: let's take a breath and look at territory we discovered today.
• 25:42
  Speaker 0: We started on John DeCleart jammed exit escalator Unpacking how the three trillion dollar backlog is basically forcing GPs to abandon financial engineering and focus strictly on real operational performance.
• 25:55
  Speaker 1: Then
• 25:56
  Speaker 0: we stripped a hype away from AI realizing that you cannot transform a business without fixing data engineering plumbing first, ensuring Portco CEO actually leads.
• 26:07
  Speaker 0: We saw how crucial it is to close the operational talent gap, relying on low ego interim leaders who can cut through discovery time.
• 26:13
  Speaker 0: Mm-hmm.
• 26:14
  Speaker 0: we explored How independent sponsors are using incredibly lean structures and seller partnerships To completely dominate multiple arbitrage in the lower middle market.
• 26:23
  Speaker 0: And finally we navigated the macro realities of impending credit wipeouts strict new FDI regulations In this severe cultural risks of entering niche ecosystems.
• 26:32
  Speaker 1: It is a market that is aggressively weeding out tourists and demanding deep operational rigor at every single level.
• 26:39
  Speaker 1: And to leave you with one final provocative thought to mull over, I want to draw on an insight from Stefan Fritz.
• 26:46
  Speaker 0: What's up?
• 26:47
  Speaker 1: Well as AI accelerates value migration moving economic value away from traditional software layers and toward agentic operators The very structure of the private equity model might be fundamentally challenged.
• 27:00
  Speaker 1: The standard PE fund operates on a rigid seven to ten year cycle, but the technology realities they're investing in are now cycling every two to four years.
• 27:09
  Speaker 0: Oh wow!
• 27:10
  Speaker 0: That's huge mismatch
• 27:11
  Speaker 1: Right.
• 27:11
  Speaker 1: so this raises really critical question Will limited partners soon realize that traditional blind pool vehicle is structurally just too slow for world it invests?
• 27:20
  Speaker 0: That is definitely something to think about.
• 27:23
  Speaker 0: If you enjoyed this episode, new episodes drop every two weeks!
• 27:26
  Speaker 0: Also check out our other editions on Venture Capital, M&A and Strategy & Consulting.
• 27:31
  Speaker 0: Thank-you so much for joining us on the Deep Dive.
• 27:32
  Speaker 0: Make sure you hit subscribe So that never miss an insight And we'll see ya next time.