Stunned by what I learned from a mid-market PE portco that was looking at a 3X valuation growth & exit in ~3 years - the PE keeps buying companies and rolling them up into the existing portco getting rapidly to a 3X valuation. How is this so easy? Doesn’t feel Iike in consulting we would make as much money as VP/SVP level roles in PE portcos with some great equity comp, even though we work twice as much. Do such plays by PEs have a low risk of not meeting the exit price or time targets?

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The house of cards will happen at some point in the next few years. Way too many PE firms buying these small accounting/consulting shops. On the face, good investments because asset light and decent margins. The only way they can show decent (double digit) growth is by acquiring revenue through acquisitions and taking out some back office costs. The problem is that there is little to no organic growth and the culture at every PE invested firm that I am aware of has suffered significantly. The lower performing partners get fired (not a bad thing) but the higher performers leave. There are only so many “flips” that will happen. Many funds will be caught holding on to these firms for a very long time. Again, not a bad thing as the margins are relatively good. But at some point, the LPs want a return/liquidity event. Will be very curious as to see what happens. My best guess is that 25% achieve the returns they expect.

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EY1: OP1 didn’t say what industry. Tech is a very different game than services

Selling out future generations to outside shareholders sounds like a great idea until the music stops

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F

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Majority of people I know in PE never hit the jackpot

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Feast or famine OP. In rising markets, with easily available capital, it really is as easy as it seems. When the music stops, then the LPs take a huge haircut.

Yes, suggesting the music is slowing…

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Many firms use roll up strategies to build value. Sometimes works, sometimes doesn’t. When they are buying these companies, are they taking on debt? Growing value 3x by buying companies won’t work if too much debt is ahead of the equity value. Not to mention all the operational things that can go wrong with acquisitions and integrations…

In most industries, you pay a premium to buy the companies you are rolling up too. Best if you can pay in equity.

It’s not easy. This might be one of the hardest times PE has faced in getting to exit. They have a ton of companies in the inventory, some financed at Covid lows and until recently couldn’t see an exit path. That’s why you hear of continuation funds. I wouldn’t fall for the hype. Some PEs will do well in the next year. Others are gonna get hammered.

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