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Best of LinkedIn: Private Equity: Exit Strategies CW 40/ 41 · Best of LinkedIn: Strategy, M&A & Investments

• 0:00
  Speaker 0: Provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about private equity exit strategies insights in calendar weeks.
• 0:07
  Speaker 0: forty-and-forty one.
• 0:09
  Speaker 0: Freenes supports PE backed manufacturers with market intelligence needed to unlock revenue from idle production capacity.
• 0:15
  Speaker 0: You can find more info in description
• 0:17
  Speaker 1: Right.
• 0:17
  Speaker 1: so just a set expectations right off bat.
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  Speaker 1: Today's deep dive is laser focused on top Private Equity Exit Strategy trends across Linkedin.
• 0:25
  Speaker 0: Yeah big ones
• 0:26
  Speaker 1: Exactly.
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  Speaker 1: Because for professionals navigating today's M&A landscape, I mean the playbook has fundamentally shifted.
• 0:32
  Speaker 0: It really has.
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  Speaker 1: We are unpackaging the math The liquidity crunches and just harsh realities of modern deal-making.
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  Speaker 0: And we really need to begin by examining the macro shift in how deals are underwritten Today.
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  Speaker 0: Right because honestly the disappearance of cheap debt is the domino that triggers every other exit strategy trained were going to discuss.
• 0:51
  Speaker 1: Oh absolutely!
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  Speaker 0: The mathematical reality of private equity Is Just Changed Multiple expansion and, you know debt pay down.
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  Speaker 0: They can no longer hide average operational performance.
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  Speaker 1: No they really can't.
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  Speaker 1: And Santy Thomas detailed the stark math facing large biots.
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  Speaker 1: right now it is.
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  Speaker 1: It's pretty wild to look at
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  Speaker 0: what are the numbers?
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  Speaker 0: Look like
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  Speaker 1: well imagine a twenty billion dollar fund if its operating without leverage It would need its portfolio companies to grow EBITDA at seventeen percent annually.
• 1:20
  Speaker 1: wait
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  Speaker 0: What yeah
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  Speaker 1: Seventeen percent a year for five years straight just to hit a two X net return.
• 1:25
  Speaker 0: Hold it, let me push back on that because expecting seventeen percent annual EBITDA growth across an entire portfolio.
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  Speaker 0: That is like expecting a mature oak tree to grow at the speed of bamboo?
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  Speaker 1: It's
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  Speaker 0: just not realistic.
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  Speaker 0: I mean Thomas notes that historically only about one in eight large companies ever achieve a fifteen percent growth rate.
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  Speaker 0: so seventeen is just well.
• 1:49
  Speaker 0: it's a pipe dream for an entire
• 1:51
  Speaker 1: which is exactly why leverage isn't doing the heavy lifting anymore.
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  Speaker 1: Christopher Jay Conti brought some fascinating data into this, median equity checks have actually hit a ten-year high of seven point five X EBITDA.
• 2:03
  Speaker 1: Wow!
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  Speaker 0: Seven point five x that is a massive amount of equity to put down
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  Speaker 1: right.
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  Speaker 1: so The thesis Isn't the capital structure any more?
• 2:12
  Speaker 1: That thesis Is basically just the management team.
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  Speaker 0: you know it connects perfectly to Seth Marin's historical perspective on If you look back, the LBO booms of the nineteen eighties and mid-two thousands.
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  Speaker 0: they ended in massive restructurings once that cheap debt vanished.
• 2:28
  Speaker 1: Oh right like some those legendary blow ups
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  Speaker 0: Exactly Like RJ Arnabisco or TXU The debt goes away and suddenly whole house of cards just kinda comes down.
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  Speaker 1: Yeah because hold.
• 2:39
  Speaker 1: periods are stretching out now And debt is so expensive.
• 2:43
  Speaker 1: Matt K had a really great tactical takeaway.
• 2:46
  Speaker 0: What was it?
• 2:47
  Speaker 1: Working capital efficiency is now totally central to value creation.
• 2:50
  Speaker 0: Oh, absolutely
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  Speaker 1: I guess cash flows everything right?
• 2:52
  Speaker 0: Now exactly
• 2:54
  Speaker 1: i mean every dollar trapped in late receivables Is effectively borrowed at like ten percent or more.
• 2:59
  Speaker 0: it's just burning money At that point.
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  Speaker 1: yeah you can't Just ignore a sloppy billing cycle anymore.
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  Speaker 0: and since companies Can be easily flipped using That cheap debt Whole periods are extending, which leads directly to a massive bottleneck in returning cash to investors.
• 3:12
  Speaker 1: The liquidity crunch?
• 3:13
  Speaker 1: Exactly!
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  Speaker 1: Yeah there is this growing really intense tension between paper valuations and actual cash returns.
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  Speaker 1: right now
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  Speaker 0: It's getting pretty severe.
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  Speaker 1: Very Tom Cain pointed out that there isn't estimated four-to five trillion dollars in PE inventory.
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  Speaker 1: Trillion
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  Speaker 0: with a T Trillion
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  Speaker 1: With A T. That's
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  Speaker 0: insane.
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  Speaker 0: it
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  Speaker 1: represents around thirty five thousand unsold companies just
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  Speaker 0: sitting here just strand it, which brings us to a great example from LDR Muratov.
• 3:40
  Speaker 0: Family office is really feeling this pinch.
• 3:42
  Speaker 1: Oh I bet
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  Speaker 0: they're seeing reports of a fifteen percent IRR in this massive net asset.
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  Speaker 0: value right looks
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  Speaker 1: great.
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  Speaker 1: on the spreadsheet look
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  Speaker 0: fantastic.
• 3:50
  Speaker 0: but then we experience DPI distributions to payday and capital up.
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  Speaker 0: just point one zero X.
• 3:57
  Speaker 1: oh man
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  Speaker 0: yeah.
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  Speaker 0: so when actually needs say thirty million dollars for new acquisition They realize that a fifteen percent return on paper is totally meaningless without an actual liquidity plan.
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  Speaker 1: That's brutal, but you know even the general partners are feeling this squeeze.
• 4:13
  Speaker 0: Really?
• 4:14
  Speaker 0: GPs too!
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  Speaker 1: Nicola Vukovic noted European PE executives increasingly taking out expensive
• 4:22
  Speaker 0: personal loans
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  Speaker 1: against their unpaid carried interest
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  Speaker 0: just to fund capital calls or secure day-to-day liquidity because exits aren't happening.
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  Speaker 0: So they are basically taking out high interest payday loans against their own stuck performance bonuses.
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  Speaker 1: Pretty much.
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  Speaker 0: And it's wild!
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  Speaker 0: I mean, historically dividend recapitalizations were the release valve for this exact kind of pressure.
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  Speaker 1: Right you'd just borrow more against a company and payout the LPs
• 4:47
  Speaker 0: Exactly.
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  Speaker 0: but Isaac T reports that recap volume actually fell fifty percent year over year through July due to elevated interest rates.
• 4:56
  Speaker 0: The math doesn't work right now.
• 4:58
  Speaker 1: But i do have question about When a sponsor actually does manage to pull off a dividend recap in this high-rate environment, who actually bears the risk?
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  Speaker 0: That is The Million Dollar Question.
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  Speaker 0: And Mitchell Ozak's analysis of rollups shed some light on it.
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  Speaker 0: He cited the NBER which found that A typical dividend recap increases affirms debt by eighty four percent.
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  Speaker 1: Eighty Four Yeah
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  Speaker 0: Wow yeah and it spikes the probability of bankruptcy within six years By thirty one percent.
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  Speaker 1: So they just saddle the company with debt and walk away
• 5:27
  Speaker 0: pretty much.
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  Speaker 0: It often leaves the target shareholders holding the bag while this sponsor extracts cash.
• 5:32
  Speaker 1: That is a tough pill to swallow for founders!
• 5:35
  Speaker 1: By the way, if you're finding that deep dive into the mechanics of PE useful make sure to subscribe so catch all our future additions.
• 5:41
  Speaker 1: Absolutely
• 5:43
  Speaker 0: So.
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  Speaker 0: with buyers being so incredibly picky and capital constrained how a company organizes its financials in technology long before sale dictates whether it can exit at all.
• 5:53
  Speaker 1: Yeah...you really have to re-architect everything.
• 5:56
  Speaker 0: Exit optionality isn't a strategy.
• 5:58
  Speaker 0: You can just pivot to in year four.
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  Speaker 0: It's a fundamental architectural decision that has to be made on day
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  Speaker 1: one.
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  Speaker 1: Brad Wolf made an excellent point about this.
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  Speaker 1: keeping multiple exit paths open is at its core purely A finance decision.
• 6:11
  Speaker 0: now how so
• 6:12
  Speaker 1: well.
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  Speaker 1: strategic buyers want synergies, right?
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  Speaker 1: They want mapped charts of accounts
• 6:16
  Speaker 0: sure for easy integration.
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  Speaker 1: But financial sponsors they want unarguable working capital.
• 6:21
  Speaker 1: pigs and IPOs require heavily tested controls.
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  Speaker 1: you can't fake that at the last minute.
• 6:27
  Speaker 0: Which perfectly reinforces what Natalie Townsend cited from an EY study, over sixty percent of PE firms view financial data and KPI readiness as their single biggest challenge heading into
• 6:47
  Speaker 1: And it highlights the danger of capital structure mismatches too.
• 6:51
  Speaker 1: Su-Yi Tan shared this crazy story about the firmest IPO collapse.
• 6:54
  Speaker 0: Oh, I saw that.
• 6:55
  Speaker 0: Yeah That was massive.
• 6:57
  Speaker 1: They tried to float on ASX at a valuation of forty four billion Australian dollars Billion But they only had forty six megawatts of live AI capacity and this massive unfunded capex pipeline.
• 7:10
  Speaker 0: So...they were trying price construction project like finish software product.
• 7:15
  Speaker 1: Exactly Public markets outright rejected pricing heavy infrastructure on high-margin SaaS multiples.
• 7:21
  Speaker 1: The market just said, no
• 7:23
  Speaker 0: I mean you can't just wave your hands and say AI to justify that kind of valuation anymore.
• 7:28
  Speaker 0: Though speaking of technology Chandan Mahajan argues that diligence teams must ask if a company owns or rents its AI.
• 7:36
  Speaker 1: Oh That's really interesting distinction.
• 7:38
  Speaker 1: It is
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  Speaker 0: critical.
• 7:40
  Speaker 0: A one million dollar annual AI bill If You're Just Renting it actually reduces your exit valuation by fifteen million dollars at a fifteen X multiple.
• 7:48
  Speaker 1: That is the direct hit to the exit value,
• 7:51
  Speaker 0: though I'd
• 7:51
  Speaker 1: push back on that bit using Asif Rahman's logic.
• 7:54
  Speaker 0: Okay what's his take?
• 7:56
  Speaker 1: Even if you own the AI productivity doesn't automatically equal EBITDA.
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  Speaker 0: Why not?
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  Speaker 0: If you're working faster shouldn't margins go up?
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  Speaker 1: You think so but if AI makes your engineers code twice as fast Your sales team doesn't magically sell twice as much.
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  Speaker 0: Oh i see The bottleneck just moves Right.
• 8:12
  Speaker 1: Instead, your customer support queue just blows up because you're shipping so much code.
• 8:17
  Speaker 1: It's like putting a Ferrari engine in a golf cart!
• 8:20
  Speaker 0: I love that analogy...
• 8:21
  Speaker 1: Yeah the bottleneck just ships to the axles and they eventually snap.
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  Speaker 1: You haven't actually made this business more profitable.
• 8:27
  Speaker 0: That makes total sense.
• 8:29
  Speaker 0: Having explored these strict demands of modern buyers we really need turn the lens to founders and target companies themselves.
• 8:35
  Speaker 1: The human element of all this.
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  Speaker 0: Exactly Because navigating these intense PE environments is whole different ball game.
• 8:42
  Speaker 0: We have to look at sector-specific treadmills in preparation.
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  Speaker 1: There is this realization now that, In many sectors a PE exit isn't the final destination.
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  Speaker 0: What is it then?
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  Speaker 1: It's just a ticket To another larger PE funds holding period.
• 8:56
  Speaker 0: I'm Jed Mahmoud had A staggering statistic on this.
• 8:59
  Speaker 0: Ninety seven point eight percent Of physician practice exits Simply sell to Another PE firm.
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  Speaker 1: Almost ninety eight percent.
• 9:06
  Speaker 1: Yeah
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  Speaker 0: It's a total mismatch of long-term healthcare assets being financed by short term, five year capital.
• 9:12
  Speaker 0: Just flips and flips
• 9:13
  Speaker 1: And this happens in Background Screening too.
• 9:15
  Speaker 1: Jason Morris pointed out that companies change hands four or five times.
• 9:20
  Speaker 0: Wow That sounds exhausting for the management team.
• 9:23
  Speaker 1: it is Every time there's closing dinner.
• 9:26
  Speaker 1: it resets strategy and delays integrations.
• 9:29
  Speaker 0: We just probably why Preston Alexander argues independent medical practices often out earn PE acquired ones.
• 9:35
  Speaker 1: Oh really?
• 9:36
  Speaker 1: How does the math on that work?
• 9:37
  Speaker 1: Well,
• 9:37
  Speaker 0: the rollover equity.
• 9:38
  Speaker 0: The founders have to take gets trapped in a stagnant secondary market.
• 9:42
  Speaker 0: if the company keeps getting flipped or delayed they never actually see that cash.
• 9:45
  Speaker 1: so there better off just staying independent and taking the cash flow.
• 9:48
  Speaker 0: often yes And Adam coffee brings up a great warning about survivorship bias here.
• 9:53
  Speaker 1: Oh people only looking at the winners
• 9:55
  Speaker 0: exactly Founders Only study the peers who successfully exited got that second bite of the apple.
• 10:01
  Speaker 0: They completely ignore the seventy three percent Who fail.
• 10:05
  Speaker 1: Seventy-three percent fail.
• 10:07
  Speaker 1: Yeah,
• 10:07
  Speaker 0: because they just weren't ready for the brutal reporting cadence and the hundred day playbook of a PE board.
• 10:13
  Speaker 1: Which is why Alexis Sikorsky's framing is so brilliant.
• 10:16
  Speaker 1: He says PE firms subject founders to a quote unquote six month colonoscopy Of diligence.
• 10:22
  Speaker 1: that
• 10:22
  Speaker 0: paints quite a picture.
• 10:23
  Speaker 1: it does but its true.
• 10:25
  Speaker 1: yet Founders rarely scrutinize The buyers who they will actually be reporting two four years.
• 10:30
  Speaker 1: They don't diligence the sponsor.
• 10:32
  Speaker 0: That's a massive mistake.
• 10:34
  Speaker 0: If you are taking their money, You need to know who is driving
• 10:37
  Speaker 1: the bus.
• 10:38
  Speaker 1: Absolutely
• 10:39
  Speaker 0: So.
• 10:39
  Speaker 0: To wrap things up I want to leave you with a final provocative thought to
• 10:43
  Speaker 1: mull over.
• 10:43
  Speaker 1: let's hear it.
• 10:44
  Speaker 0: if The ultimate exit for so many of these assets from health care practices to software companies It's just passing them to a larger private equity fund At what point does the private market definition?
• 10:55
  Speaker 0: Of an exit stop meaning a true realization of value and start meeting Just a routine refinancing event?
• 11:02
  Speaker 1: If you enjoyed this episode, new episodes drop every two weeks.
• 11:06
  Speaker 1: Also check out our other editions on PE Value Creation Private Equity Fundraising Venture Capital M&A and Strategy & Consulting.
• 11:15
  Speaker 0: Huge thanks for tuning into This Deep Dive.
• 11:17
  Speaker 0: Don't forget to subscribe And we'll catch ya next time.