Latest / Best of LinkedIn: Strategy, M&A & Investments / Best of LinkedIn: Private Equity: Value Creation CW 38/ 39

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

• 0:00
  Speaker 1: Provided by Thomas Alldrive and Frennus, based on the most relevant LinkedIn posts about private equity value creation in calendar weeks thirty-eight and thirty nine.
• 0:08
  Speaker 1: Frenness supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.
• 0:14
  Speaker 1: You can find more info.
• 0:28
  Speaker 1: So I want you to imagine a private equity firm dropping like half a billion dollars on AI implementation only To discover that their newest portfolio company is running its entire, you know multi-million dollar sales pipeline off A hidden spreadsheet called final version seven
• 0:45
  Speaker 0: Wow.
• 0:46
  Speaker 0: Yeah That Is a nightmare.
• 0:48
  Speaker 1: it really is.
• 0:49
  Speaker 1: The landscape of private equity is just fundamentally shifting beneath our feet right now and Our mission for this deep dive.
• 0:55
  Speaker 1: Is to unpack the absolute top trends in value creation being discussed across linkedin.
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  Speaker 0: Yeah, we are looking at a pretty brutal new reality
• 1:04
  Speaker 1: exactly.
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  Speaker 1: We're talking the new math of returns the harsh reality of hundred-day execution the shifting role of portfolio executives And well the unvarnished truth behind AI implementation.
• 1:15
  Speaker 0: I mean, if you look at the narrative connecting all these insights it really comes down to the death of financial engineering.
• 1:22
  Speaker 1: Okay unpack that a bit.
• 1:24
  Speaker 0: Well for a long time You could be just okay at operating your business But If you timed the market...you can rely on macro tailwinds right?
• 1:32
  Speaker 1: Just buy low and let the markets do their work.
• 1:34
  Speaker 0: Exactly!
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  Speaker 0: You buy at ten X sell at fifteen X but That era is completely dead.
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  Speaker 0: Operational alpha Is literally The only way forward.
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  Speaker 0: now
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  Speaker 1: Let's get into the actual math of that shift, because it is pretty staggering.
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  Speaker 1: Anton Mungfak highlighted some macro data on this?
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  Speaker 0: Oh!
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  Speaker 0: The multiple expansion numbers.
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  Speaker 1: Yeah So in twenty-twenty five, Multiple Expansion only accounted for eight percent of buyout returns
• 1:59
  Speaker 0: Just Eight Percent?
• 2:02
  Speaker 1: And before Fed raised rates It was sitting at forty per cent.
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  Speaker 1: The market just refusing to do heavy lifting for sponsors
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  Speaker 0: Right.
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  Speaker 0: so when you strip away that cheap debt Your underwriting model has completely changed.
• 2:14
  Speaker 1: You can't just engineer your way out of a bad quarter.
• 2:16
  Speaker 0: Exactly, and Matt Hines and Sean Stevens brought up this concept regarding a recent Bain report.
• 2:23
  Speaker 0: their shorthand for This is so good.
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  Speaker 0: they say twelve Is the new five
• 2:27
  Speaker 1: wait?
• 2:28
  Speaker 1: Twelve is The New Five meaning you need twelve percent growth to get what five percent used To Get you
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  Speaker 0: Precisely deals that Used to Need Just A five Percent annual EBITDA Growth to hit a two point five X return.
• 2:41
  Speaker 0: Well, now they need ten to twelve percent growth.
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  Speaker 1: That is a massive leap!
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  Speaker 1: I mean hitting five percent is basically just keeping up with inflation and maybe pulling a few pricing levers?
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  Speaker 0: Yeah but hitting twelve percent sustained.
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  Speaker 0: that requires you to fundamentally reinvent the business especially with debt costing so much more.
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  Speaker 1: The math is incredibly steep.
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  Speaker 0: It really is And Joel Weber shared some data showing revenue growth accounts for fifty seven percent of value creation.
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  Speaker 1: Fifty-seven percent.
• 3:12
  Speaker 1: Yeah,
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  Speaker 0: that's nearly double what it was in two thousand nineteen.
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  Speaker 0: Cost cutting has a floor.
• 3:17
  Speaker 0: You know the top line revenue is where three quarters of your return has to come from.
• 3:21
  Speaker 1: But okay Let me push back on that.
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  Speaker 1: math sounds great On a spreadsheet sure but can operating teams actually deliver?
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  Speaker 1: That kind of margin expansion In reality?
• 3:31
  Speaker 0: well Jordan hidden Actually gave us a huge reality check on this exact point.
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  Speaker 1: What did they find
• 3:37
  Speaker 0: so?
• 3:37
  Speaker 0: Operational margin improvement is now driving over half of evident growth, but a staggering sixty-five percent have responded.
• 3:44
  Speaker 0: say they realize less than half the value identified in their value creation plans.
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  Speaker 1: Less than half?
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  Speaker 1: So...the opportunity's there!
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  Speaker 1: But the execution capacity just failing?
• 3:55
  Speaker 0: Completely failing.
• 3:56
  Speaker 0: Operations are now THE single point at failure which means that pressure on first one hundred days is just immense.
• 4:03
  Speaker 1: Right And you see these highly polished hundred-day plans colliding with the messy reality of the organization.
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  Speaker 0: Scott Peters noted something really interesting here, he said value creation rarely fails because the strategy was wrong.
• 4:16
  Speaker 1: It's the execution speed right?
• 4:18
  Speaker 0: Exactly it fails because execution wasn't fast enough.
• 4:22
  Speaker 0: He argues You need ruthlessly strict baselines a few KPIs and rapid leadership evaluation.
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  Speaker 1: But Dr Sasha Hagenmuller brought in up pretty sobering reality check about those plans.
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  Speaker 0: Oh, this statistic about the professionals?
• 4:35
  Speaker 1: Yeah.
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  Speaker 1: Forty-two percent of professionals admit their own one hundred day plans are unrealistic.
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  Speaker 0: Wow!
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  Speaker 0: Almost half.
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  Speaker 1: And poor data quality is second most common stumbling block in an exit.
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  Speaker 1: It sounds like PE firms were designing a Formula One race strategy without checking if car actually has engine.
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  Speaker 1: You know
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  Speaker 0: That's great way to put it.
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  Speaker 1: Like.
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  Speaker 1: why these plan so totally disconnected from reality?
• 4:56
  Speaker 0: Well Dr Nor Salman identifies root cause perfectly.
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  Speaker 0: She calls them unmodeled organizational assumptions.
• 5:03
  Speaker 1: unmodeled organizational assumptions.
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  Speaker 1: What does that actually look like in practice?
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  Speaker 0: Okay, think about it like this.
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  Speaker 0: The financial model works perfectly.
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  Speaker 0: It falsely assumes the organization has clear decision authority Accountability and information flow.
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  Speaker 1: So it assumes the VP of sales Has the power to just enforce an eight percent price hike.
• 5:22
  Speaker 1: right
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  Speaker 0: but In reality maybe the founder is been manually approving every client discount for twenty years.
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  Speaker 1: Ah, so the model assumes that structure is there but it isn't.
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  Speaker 0: Exactly!
• 5:34
  Speaker 0: Francisco Lara expanded on this too – he argues operational excellence isn't just a one-hundred day checklist.
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  Speaker 1: Right you have to standardize discipline.
• 5:42
  Speaker 1: Yes
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  Speaker 0: You need operators before the ink dries and build data infrastructure first.
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  Speaker 1: Do your Michelle provided highly specific examples with IT integration?
• 5:54
  Speaker 0: The shadow spreadsheets?
• 5:55
  Speaker 1: Yes.
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  Speaker 1: The integration plan might focus on a shiny new ERP, but the business is actually being run by hidden spreadsheet titled final v seven.
• 6:05
  Speaker 1: use this one that calculates commissions.
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  Speaker 0: You literally can't execute a plan without understanding those shadow processes right
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  Speaker 1: and really quickly.
• 6:14
  Speaker 1: if you're finding This breakdown valuable make sure you subscribe to this deep dive so you don't miss future editions.
• 6:19
  Speaker 1: It's the best way to keep up with these trends.
• 6:20
  Speaker 0: definitely
• 6:22
  Speaker 1: You know, going back to executing those complex data heavy one hundred day plans.
• 6:27
  Speaker 1: you really need the right leaders for that?
• 6:29
  Speaker 0: You do but PE firms are frequently hiring for the wrong things especially in The Finance Function.
• 6:36
  Speaker 1: Tim Garels talked about this.
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  Speaker 1: Right Yeah!
• 6:38
  Speaker 1: The whole unicorn hunting concept.
• 6:40
  Speaker 0: Yes Sponsors demand these impossible candidates.
• 6:43
  Speaker 0: They want someone who can turn around drive double digit growth Do M&A Rebuild a team Manage a difficult founder
• 6:50
  Speaker 1: And I bet they want them traveling a hundred percent of the time, too.
• 6:53
  Speaker 0: Exactly!
• 6:54
  Speaker 0: It's just an impossible standard.
• 6:56
  Speaker 1: Mark Janssen zeroed in on how this impacts the CFO role.
• 6:59
  Speaker 1: He says PE keeps hiring for scale instead of velocity.
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  Speaker 0: Oh dropping your Fortune-Five Hundred CFO into small portco?
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  Speaker 0: Yes
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  Speaker 1: They drop an executive who is used to twenty person FPNA team Into a sixty million dollar company where the ERP is ancient and cash has managed week to week.
• 7:17
  Speaker 0: Zachary Wingett actually got to the structural root of this failure.
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  Speaker 1: What did he find?
• 7:22
  Speaker 0: Well, seventy-four percent of sponsors say their CFO is underperforming but it's an architecture problem not a talent problem.
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  Speaker 1: Wait how?
• 7:29
  Speaker 1: so
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  Speaker 0: if the operating team doesn't close margins weekly The monthly clothes ends up consuming eighty percent of the CFOs bandwidth.
• 7:37
  Speaker 1: So they spend all their time just trying to figure out what happened last month.
• 7:40
  Speaker 0: Exactly!
• 7:41
  Speaker 0: They can be strategic If data is a
• 7:43
  Speaker 1: mess But with hold periods stretching this seven years now, we saw that data from Jonathan O'Leary earlier.
• 7:49
  Speaker 1: How do you keep these burnt out executives motivated if the exit is nowhere in sight?
• 7:54
  Speaker 0: That's a big question and Robert Friedman highlighted an emerging trend here.
• 7:59
  Speaker 0: We are seeing new compensation structures moving away from traditional equity waterfalls.
• 8:05
  Speaker 1: So they aren't just waiting for an IPO.
• 8:08
  Speaker 0: Instead, some executives are getting an annual payment equal to a strict percentage say five percent of pure EBITDA.
• 8:15
  Speaker 1: Wait really?
• 8:16
  Speaker 1: Not EBITTA growth.
• 8:17
  Speaker 1: just pure EBITA
• 8:19
  Speaker 0: Just pure EBita.
• 8:21
  Speaker 0: it creates this immediate alignment without waiting for a liquidity event.
• 8:24
  Speaker 1: That's incredible!
• 8:26
  Speaker 1: It totally changes the incentive structure which aligns perfectly with Shannon Talbot rule-of-thumb
• 8:31
  Speaker 0: To upgrade selectively.
• 8:33
  Speaker 1: Yeah, always assess the talent and upgrades selectively before you just redraw the boxes on the org chart.
• 8:39
  Speaker 0: You have to get people an incentives right first.
• 8:41
  Speaker 1: Absolutely So if you have the right people.
• 8:44
  Speaker 1: The ultimate lever everyone is trying pull to get that ten-to twelve percent growth Is AI?
• 8:49
  Speaker 0: Oh definitely But there was a massive gap between conference buzz And actual deployment.
• 8:55
  Speaker 1: Guillermo Flore shared a staggering number about this.
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  Speaker 1: Blackstone spend with the AI company Anthropic jumped twenty one X in a single year.
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  Speaker 1: Yeah, from two point five million to five hundred and twenty-five million dollars.
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  Speaker 1: This proves we are way past the pilot phase.
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  Speaker 1: an into full scale enterprise deployment.
• 9:13
  Speaker 1: Wow.
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  Speaker 0: But Steve Budd actually offered a reality check on that adoption.
• 9:17
  Speaker 0: Oh he noted that while seventy one percent of firms have adopted AI Only eighteen percent claim it is provided a durable advantage.
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  Speaker 1: only eighteen percent.
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  Speaker 0: yeah.
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  Speaker 0: Why's it so low?
• 9:28
  Speaker 1: It's the ceiling holding everyone back, a total lack of structured data foundations.
• 9:32
  Speaker 1: Right?
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  Speaker 1: Christopher Donito explained this failure rate perfectly.
• 9:36
  Speaker 1: he said.
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  Speaker 1: ninety-five percent of AI pilots produce no measurable P&L impact.
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  Speaker 1: Ninety
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  Speaker 0: five percent is brutal!
• 9:43
  Speaker 1: Yeah... He says companies are just trying to dress up fundamental data quality problems in fancy A.I agent costumes.
• 9:49
  Speaker 0: That's a great visual and Philip Kraft highlighted The Human Risk Of Getting This Wrong.
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  Speaker 1: What happened?
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  Speaker 0: Well, he used Meta as an example.
• 9:58
  Speaker 0: They made the mistake of cutting headcount before redesigning the actual workflows...
• 10:03
  Speaker 1: ...they just assumed that AI would cover the gap?
• 10:05
  Speaker 0: Exactly!
• 10:06
  Speaker 0: The required sequence must be design first automate second measure third and only then let the organization in head count follow.
• 10:16
  Speaker 1: So if scattered pilots fail and premature cuts fail how does a PE firm actually scale AI across a massive portfolio?
• 10:24
  Speaker 0: Lucharan Chakrabati provided a model for this.
• 10:27
  Speaker 0: The winners are stopping the scattered experiments and building an AI factory!
• 10:32
  Speaker 1: An AI Factory?
• 10:34
  Speaker 1: Yeah,
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  Speaker 0: it's a unified two-tier machine operating across the entire portfolio rather than each company trying to build it from scratch.
• 10:41
  Speaker 1: That makes total sense.
• 10:43
  Speaker 1: Centralize the heavy lifting
• 10:44
  Speaker 0: Exactly
• 10:46
  Speaker 1: Well looking at all of these I want leave you with final lingering question.
• 10:51
  Speaker 1: With PE hold periods lengthening, returns relying entirely on operating data and massive cross-portfolio AI deployments becoming the norm.
• 11:00
  Speaker 1: Are we witnessing end of traditional financial sponsor?
• 11:03
  Speaker 0: It's a fascinating question.
• 11:05
  Speaker 1: Will private equity firms in future look less like investment banks or more like giant highly integrated tech and software holding companies.
• 11:14
  Speaker 0: I guess will have to wait & see
• 11:15
  Speaker 1: If you enjoyed this episode, new episodes drop every two weeks.
• 11:19
  Speaker 1: Also check out our other editions on PE Fundraising, PE Exit Strategies Venture Capital M&A and Strategy & Consulting.
• 11:27
  Speaker 0: Thanks so much for joining us!
• 11:28
  Speaker 0: And remember to subscribe.