312. Improving private equity exit prospects

0:01Christian Habrich: We entered an exit process with a company and they were total outperformers 12 months ago. Then the AI wave came and the entire business model was, the outlook was not that clear. And they totally underestimated the relevance in the exit process. Our core learning is that right now you have to have special deep dives in your exit two years before you plan to exit in order to understand what's the downside or the upside.

0:30Jelena Bauer: From McKinsey & Company, I'm Sean Brown, and welcome to Inside the Strategy Room. That was Kai Volhart on what leading-edge exit readiness looks like today. While private equity deal value is up an impressive 19%, the road to exit is actually becoming more complex, with a 15 % decline in exit count seen over the last decade. Along with his colleagues, Kai joins us to talk through these challenges and what separates exits that close at target multiples from those that fall short. Sharing insights from their latest research and recent McKinsey.com article titled, Beating the Odds, How Private Equity Firms Can Improve Exit Prospects, they dive into key success factors from a structured portfolio-wide approach to exit governance to translating AI potential into a credible value story.

1:22Jelena Bauer: We've provided a link in the episode description to the article. And for more insights from our private capital practice, we encourage you to check out our latest annual Global Private Markets Report, which we've also linked to in today's show notes in the description. And now it's my pleasure to introduce our guests. Kai Volhart is a senior partner based in our Frankfurt office. He's a core member of our private equity practice leadership team, and he leads our Exits service line in Europe. Kai, it's great to have you here today. Thanks for having me, Sean. And Christian Harbrich is a partner based in our Frankfurt office and a leader in our private capital practice in Europe.

1:58Jelena Bauer: Christian, welcome to the podcast. Thanks a lot, Sean. Yelena Bauer is an associate partner in our Berlin office and a leader in our private capital practice and exit service line. Yelena, it's great to have you here today.

2:10Frederyk Schroeder: Thank you. Amazing to be here.

2:11Jelena Bauer: And Frederick Schroeder is an associate partner in our Copenhagen office and a leader of our European private capital practice and our exit service line. Frederick, welcome.

2:20Kai Vollhardt: Thank you, Sean. It's a great pleasure.

2:23Jelena Bauer: Caillou and Yelena, along with other colleagues, recently published an article on how PE firms can improve their exit prospects. Perhaps to start off, you could share some background on the reason why you wrote the article.

2:35Christian Habrich: I'm very happy to. So we talked to many CXOs over the course of the last 18 months. And the core learning we got or the core feedback we received was there are so many learnings during an exit process, which we would have lost before we actually started the process. That's actually the reason why we wrote that article.

2:54Jelena Bauer: What are some of the key themes that emerged as you were working on the research?

2:58Christian Habrich: First of all, we believe that exits are becoming more bumpy and the exit challenge is there and what we see right now in the market. Second, and this is what our article was about, we want to share lessons to beat the odds. And especially we want to show what did we learn from successful exits compared to unsuccessful exits? What were the differentiating factors? What did they do differently? And then the couple of moves we believe you can do Monday in order to get yourself started and prepare for a successful exit.

3:32Jelena Bauer: Wonderful. You mentioned that exits are becoming more bumpy. Fred, maybe you can tell us a little bit more about the context for today's exit challenge. Is deal value actually up or down?

3:42Kai Vollhardt: I think if we just look at the headline, it actually looks great. Private equity deal value is up 19%. It's the second highest value we've seen over the last 10 years. And it's mostly driven by buyouts. Of course, buyouts also, they are with the second highest buyout value over the past decade. and they have been the driving force of the roughly 20 % growth in private equity deal value, accounting for roughly two-thirds of it. But there's more to it.

4:09Jelena Bauer: Okay, I look forward to getting to that, Fred. But if I could just ask first, because 19 % is actually a pretty big jump, as you think about the drivers behind that, is it buyers being more forgiving as they're looking for more deals or are they actually being more selective? Yeah, thank you, Sean.

4:26Kai Vollhardt: It's a great question And it's exactly the right question. I think the answer is, unfortunately, both. So I think buyers are getting more selective. That's clearly what we see. When we unpick the numbers here, what we will see is that the majority of the uptake in deal value is driven by the largest companies, the largest deals. I think roughly 1.1 trillion of the deal value is driven by assets that transacted for more than 500 million in EV. But what is underlying that is also that the exit environment still looks more challenging, structurally more challenging than it did a few years ago. We're looking at a different interest rate environment.

5:04Kai Vollhardt: We're seeing a world where innovation is progressing at accelerating pace, especially on the AI front. We're looking at a world that also sees uncertainties at an increased pace. So the exit complexity is actually increased. It's the best assets, the largest assets that are transacting, that transact at the highest multiples. And that's been driving up the deal value. Unfortunately, that doesn't mean that for smaller assets, more complex assets, the exit environment is as favorable as it would have been five years ago, despite seeing similar deal value levels.

5:36Jelena Bauer: Okay, so the majority of increases in deal value then are driven by big deals. Maybe, Fred, you could now tell us a little bit more about the other side of the story for the smaller and more complex assets.

5:47Kai Vollhardt: Yes. I think, as mentioned, there is already a backside to the store. Where the top line looks great, exits count has actually decreased. We've seen a 15 % decline in the exit count. We're at almost the lowest level we've seen over the past 10 years. And that's the flip side of what you mentioned. It's the largest assets has transacted. However, smaller assets, more complex assets have been struggling to do so. At the same time, we see one of the oldest cohorts of PE particles, where almost 17 ,000 portfolio companies are now having a holding period of four or more years. That's almost double the number than what we would have seen eight years ago.

6:28Jelena Bauer: And are there some structural things that you're seeing in terms of what's delaying or keeping these exits from happening? Is this pent-up exit supply, or maybe there's more of a structural challenge?

6:38Kai Vollhardt: I think there is no one single end. So I think to some extent we do see, let's say, pent up exit supply. There will be assets part of the 17 ,000. They just crossed the four years mark. They're fundamentally great assets. They've struggled from a slightly unfavorable market environment, and we would expect them to transact soon. We also see a set of assets in the market where we think, let's say, there are some changes to the business. And we think an extended holding period, one or two more years of additional value creation, one or two more years of additional proof points on addressing AI, one or two more years of additional proof points to back up the equity story with real value creation really will make a dent, a positive dent in the exit opportunities.

7:23Kai Vollhardt: But then, because the environment changed, we would also expect that there's a set of assets where the entire, let's say, business case and rationale change, where you would see assets that either hold significantly more value over the next five years, where we exactly see the consideration of re -underwriting or continuation vehicles, but also the flip side. Businesses that now have significantly less attractive prospects are more challenging where the past value creation plan hasn't played out. You would also look at re-underwriting or continuation weaker, but more from a transformation angle that requires a fundamental business model.

7:57Kai Vollhardt: So it's really about unpicking the 17 ,000, understanding through multiple lenses what is the most value-creating way forward, and then also aligning your operations, your operational value creation, your operations team effort against those.

8:14Jelena Bauer: And Christian, what are your thoughts on the decline in the number of exits? Do you think this is part of a longer term trend?

8:20Christian Habrich: Yeah, look, I mean, from my perspective, it's something which we will see to carry on for a bit, right? And I think there's a lot of insecurity, you know, that's still on a lot of things. And, you know, the realization that was some of the changes we see, you know, take, for example, AI, you know, that's actually something that really requires some residual work to be done and to really have a defendable story, not only against risk, but against upside. I think we come to that later. Let me give you an example. We have just right now, I'm doing work at a client which really tries to boost up efficiency with the help of AI.

8:55Christian Habrich: So we are really going there into the full identification of customer care. And this has actually two upsides. The one is for sure to say, yes, there is some incremental run rate effects that you can actually gain. The other one is an obviously also to say, look, there is a clear story. There's a clear proof. And we come to that later, how important that will be. But, you know, I think these type of situations we would see for a while. And then in the next one or two years, we would see if there's an acceleration to really get there.

9:25Frederyk Schroeder: And what is actually quite interesting also, what you can see in our article is that the essence sold like recently, we're actually growing two to three percentage points faster than those like remaining in the portfolios. so I think that suggests that kind of like the buyers are selecting the winners in the portfolio so to say so even though maybe not the the count might might go up too much yeah it will actually clear eventually because if you're from a fund I'm pretty sure you also you want to exit your portfolio companies that are due to exit soon and so that there will be a clearance and I like to call it um kind of like in a barbell fashion right so the highest quality assets will exit first The weaker assets remain trapped a bit longer.

10:06Frederyk Schroeder: But then at some point, this will all clear up. And as I'm saying, I think the first ones actually will be the ones where significant growth has been shown in the past performance.

10:16Jelena Bauer: And Kai, how do you see this outlook evolving?

10:18Christian Habrich: Yeah, let me also just add one example. I mean, we talked about the positive impact of AI and the value creation that is happening. On the flip side, we have also seen a lot of our clients with portcodes, which are super challenged, where AI is really disrupting the business model. And here the outlook is totally unclear what is going to happen and especially how to help them to exit successfully. successfully and that's where we also spend a lot of our time right now to think through what's the downside risk and how can we turn this around into a positive story so it's so it's very hard to say how it will develop but there are structural changes maybe adding one last point

11:06Frederyk Schroeder: i mean what we also try to do because i mean obviously the the difference we've seen is in the mega deals right so that there were more mega deals in the recent future hence countdown value up is like we've actually really tried i mean at mckinsey we love doing analysis me being a mathematician even more so we really try to understand what are the key drivers of these exits is it a specific industry etc but we weren't able to get to like a very clear answer except it's a best performing asset so i think industry yes obviously as kai also just mentioned when it comes to ai etc there are certain industries that are a bit more um at risk Some are more at the other side of it.

11:49Frederyk Schroeder: But I'm just saying we haven't really seen any industry outperforming the other when it comes to mega deals, etc.

11:57Jelena Bauer: Right. And do you have a perspective on whether the uncertainty surrounding AI is playing a role in this? And obviously, if you don't yet know what role AI might have in your future growth, it's hard to make the valuation case. So how are companies navigating this?

12:11Christian Habrich: Yeah, we have seen actually two ways, the good way and the bad way. And just to give you a recent example, we entered an exit process with a company and they were total outperformers 12 months ago. Then the AI wave came and, you know, the entire business model was the outlook was not that clear, but they were totally convinced that their business model will continue and will continue to be successful. and they totally underestimated the relevance in the exit process, which led to, in the end, to an unsuccessful process. So our core learning is that right now you have to have special deep dives in your exit, in your VDDs, etc.

12:57Christian Habrich: Or in the ideal world, two years before you plan to exit in order to understand what's the downside or the upside. So it will not help you anymore to say, we believe that this is happening and you have it in your value creation plan for the next owner, you need to have proof points already implemented in the idea world showing already P &L impact.

13:19Jelena Bauer: I know we'll talk more about AI in a little bit, but for now, Yelena would like to get back to your article in Research. And let's talk a little bit more about what separates exits that close at target multiples from those that don't. Can you take us through the six key moves from your research that you found really make a difference?

13:37Frederyk Schroeder: So let's actually go to our six lessons. And as I mentioned in the beginning, we've written an article kind of like teased out all the lessons we've heard here and there. And so let me just go through the six of them. And then we actually go on a deep dive in the ones that we most frequently hear being of interest. So the first one is shape your exit story before the acquisition closes and then continue to refine it through ownership i think that the the main message there is like you start building the accessoid acquisition and not only when you know actually the bank is mandated you call the consultant to write the vdd i think that's pretty clear and the kind but but let me let me sorry let me add on

14:18Christian Habrich: this because this sounds so obvious but when we i mean we do we do a lot of expert calls with funds and i would say two years ago they talked about what's the value creation yeah how's the market How does the market develop, etc.? In the last couple of months, the first question we got most of the time was, what is the exit path? What do we need to think through? So the dynamic in these calls totally changed. Sorry, Yanena.

14:46Frederyk Schroeder: No, absolutely. I think the second one around cultivate buyer appetite and actually really understanding who your next buyer is. I think buyer cultivation sounds somewhat just like a relationship networking task, but we actually always say it's market intelligence for your value creation plan. So what we mean with this, and we've also quoted that in our articles, actually, I think in the PE exits in Europe in 2025, 60 % were trade sales, highest in 10 years or so. And then IPO activity remained somewhat muted, I guess, as many of you know. And so it's what is actually like, who is actually the buyer that you're going to end up with?

15:33Frederyk Schroeder: And how can you actually cultivate them? And then also, how can you kind of like work through this two years in advance, right? So what we as McKinsey often do when we're at the tail end of this and we support with VDDs, we are writing multiple VDDs, so to say.

15:49Jelena Bauer: And just to clarify, in a private equity exit, a VDD refers to a vendor due diligence, which allows potential buyers to evaluate an asset efficiently. Jelena, back to you.

16:00Frederyk Schroeder: Yeah, so we have one for the strategic buyer that might have somewhat different questions than a financial buyer, etc. So how can you actually make sure that you have the right people at the right time talking to the right buyers and then your entire stack behind getting ready for these different conversations? Third one around managing exit timing and sequencing. I would like to highlight governance here. So this is really about the governance in funds of how you look at your entire portfolio. Fourth one is around pressure testing exit readiness. So what I mentioned earlier that you're actually two years before and you sit down, you're like, what is now what I need in order to get exit ready?

16:41Frederyk Schroeder: What is actually my path to exit and how do I get there? The fifth one is then really building visible performance momentum. And then the sixth one, as we already briefly started talking about, is actually translating AI potential into a credible story that has measurable results already before the exit. So not only having a strategy, but already having certain proof points, but then also leaving quite a bit of momentum for the next owner. So these are the six lessons.

17:11Jelena Bauer: Thanks very much, Yelena, for taking us through those. So before we dive into some of these lessons, they do seem like timeless insights. So how have they evolved over the last six years, for example, with disruptions like AI?

17:23Frederyk Schroeder: Yeah, so definitely the lesson number six, I think that is top of everyone's mind now. And I think important there, it doesn't matter if this is like a heavy industrial machinery company or it's like a tech software player, right? So obviously there are different questions to be answered. But even for the first one, you want to have some path forward laid out and also some proof points already. And even if it's just that you have your data ready in a lake that could then be easily, you know, translated into applying AI to it. So I'm just saying even just kind of like generating certain proof points.

18:05Frederyk Schroeder: And maybe you start with, you know, we talk about later in more detail with like an HR pilot. Whatever it is, just to show that you have some sort of proof point that you are AI ready. You have these three people in the company that know what it stands for and actually can work with it. And then obviously, if you have a tech player, it becomes much more relevant, right? So your entire company, your entire product needs to be AI proof ready, so to say.

18:28Christian Habrich: Maybe let me build. I think it's for sure that's the biggest change. The others seem very timeless. But what we actually saw is, you know, that there's, you know, it's pretty remarkable heterogeneity of, you know, how they were applied, right? So you actually have a couple of funds that are, you know, that have been thorough around this, you know, for quite some time. And we also see from the survey results and how important many of these are, but still traditionally we observed that, you know, some of that stuff hasn't been, you know, executed so thoroughly as it potentially will be and hopefully will be in the future.

19:02Christian Habrich: that it's really still becoming a lesson to apply going forward because it also may be more important than it has been in the last, let's say, couple of years where there was a lot of easy exits because there was also very good appreciation of the multiples. Everything was relatively falling nicely into place. And now with a bit of a different situation, we have really seen that these maybe timeless lessons become even more important.

19:32Jelena Bauer: And so as we look at these six lessons, is the sequence of how you actually pursue them important? Or should you be focusing on anything as a first priority? Or is it more sort of an integrated set of levers that you want to pull? Fred?

19:48Kai Vollhardt: So my version is that all of the six lessons, they have different status in the deal lifecycle, right? If you start at the top, that's very much where you had the acquisition of a new asset. And I think already spending the time in the acquisition process, what is going to be my exit story? But an question I get increasingly from my clients already in the diligence is what would the exit universe look like? What would be your exit story for that group of buyers? I think to have an exit path. So I think to me, the first one, that's what you could really start with when you're in active acquisition processes right now, because that's when those one or two really start.

20:27Kai Vollhardt: I think number three, I think, Jelena, I think you very well emphasized the notion of governance. I think that's an ongoing process. It's an ongoing capability. You and the fund monitoring, what is my portfolio? back to the question of these 17 ,000 companies with a holding period of over four years, over 20 ,000 for more than three years. Having a view of that group of company, what's the ideal route? So I think that's happening very much on the fund level, looking at the portfolio. It's an ongoing process to have an ongoing view of how ready are we? How is our exit view evolving? And then I think 0.45 and 0.6, I think that's really happening in the last 12 to 24 months before the exit, where you need to make sure, are we exit ready?

21:13Kai Vollhardt: Go through it diligently, build performance momentum, build the proof points behind your exit story. So I think four and five become extremely important there. And then I think because of, I think, of course, the transformative nature of six, I think no matter where you in the deal cycle are, whether it's in the buy side diligence and you test the downsides or you need to underwrite the upsides, whether it's mid-hold period and you need to understand how it feeds into your exit story. I think number six, you would need to have top of mind, no matter what you are.

21:44Christian Habrich: I mean, if you reframe the question a bit into when to apply these, you know, what order should you go about them? The answer would be all at the same time, right? So because, you know, you will have a couple of things to structurally change, and you will have assets in your portfolio that are in the right window for some of these very important elements, you know, right now. And so really thinking through which lesson applies to which part of your portfolio, how you can actually have a structured approach, thinking that through. I think that's a bit of the uncomfortable answer on, you know, let's do it all, right?

22:20Christian Habrich: I think that's the other version of the answer.

22:24Jelena Bauer: Okay. And Yelena, do any of these lessons stand out as particularly harder to do than the others? And where does the responsibility for actually pursuing them sit? I'd imagine some are fully owned by the portfolio company CEO, for example, number one shaping the exit story, or are some owned by someone else in the organization or perhaps others in the fund?

22:46Frederyk Schroeder: I actually think like number one really sits with the CEO and obviously in close relationship with the fund management right but it's really so what we've seen over and over again is that they are so deep into what they do as a CEO which is exactly the right thing right because you want to grow your business etc but then you might lose a little bit the the view on what is actually my I wrote in the next three, four, five years. And if you're actually in the driving seat as a CXO management, you can actually, yeah, you can shape the narrative versus just, you know, being handed it down from the fund.

23:29Frederyk Schroeder: So I think it's like if the CEO or the CXO actually manages to actively drive number one, that's always a marker for success of what we have seen.

23:39Jelena Bauer: Great. And Kai, anything you'd add there around responsibility or a lesson that's particularly difficult in your view?

23:44Christian Habrich: I would add on number five. So based on some learnings with clients over the last 10 plus years, the five sounds so simple and like create additional momentum. But it's so tough. It's so tough, especially in current geodynamics and what happens in the world, etc. But this is where it really counts. And, you know, you have your operations, your daily operations. And typically number five is for sure daily operations, but mostly also on top of it. So it's getting tougher and tougher. And this is where you really need to focus your energy on. And that's also where you need your management team. It's not only the CEO or the COO.

24:28Christian Habrich: It's the entire team around you. And potentially not only management, but also fund. So this is something that sounds so simple, but it's actually a tough one because it's a marathon, not a sprint. And there is no guarantee that it's going to work. So I would agree. I think many of these things can be done by, you know, bringing in structures into place, changing a bit the way you work at fund level or in the interaction between the management teams and the funds, right? But, you know, the five and six, it reads easy, but it's typically, it's quite hard, especially if, you know, So you have to do that a bit independently of your market environment, right?

25:08Christian Habrich: So you really want to show positive momentum, even if your market is tanking a bit or anything, right? So all of this is actually very hard work and requires very strong management teams and good collaboration with the larger numbers also of operating partners that are working in close collaborations with the management teams, right?

25:31Jelena Bauer: And so what role does re-underwriting play here? Do you see companies re-underwriting the deal during the hold period? And how does that play into setting up for the best exit?

25:41Christian Habrich: I mean, we see that quite a lot these days, right? So there's a lot of discussions. The rationales are different, right? I think Fred mentioned earlier that there's also a lot of positive re-underwriting, I would say. So if you actually see assets that are developing extremely nicely, you actually find co-invest opportunities in there. you try to potentially create some MOM, you know, in the meantime, but, you know, at the same time, you know, they also see really re-underwriting and rolling into the next funds because you really believe in the upside and you really believe in the operational ability of the assets to really perform very nicely.

26:17Christian Habrich: And then on the other end side, yeah, you see also the case, you know, that you try to buy time to really get some of the things operationally in place that have to be in place, right? And this is obviously then the tougher situation. And that's also when it, you know, when it becomes even more important. But, you know, I would say with these six lessons, no, I don't think they are directly correlated with re-underwriting. My personal take at least would be they are true, independent if you are thinking about such a process.

26:49Jelena Bauer: Super. And Yelena, I think we'll go back now to you to do a deep dive into a few of these lessons. Where would you like to take us first?

26:56Frederyk Schroeder: yes let's jump to the lesson number three which is manage exit time and secret thing throughout the holding period where and what we mean with this is governance within funds yeah so let me ask a question i'm not i'm not i know i'm not the moderator here but kind of like what is the cost of getting exit timing wrong today so when you think about it it's a couple of years ago might have meant you might have been giving up a little bit of valuation etc but in these days and times and age where we have seen earlier where the holding period went up from six to now 6.6 years and I mean it actually now means you can miss an entire exit window and it's not only a couple of points on the valuation but actually that you shifted back by a year or two or whenever the next exit window opens, right?

27:51Frederyk Schroeder: So this is the reason why we say actually governance on the fund level is so important. So that it's not only, yeah, deal team judgment of what should now go up for sale or not, but that you actually have, yeah, a so-called exit governance committee, whatever it is then in your fund in place. How we've structured these deep dives is we've always say what is the traditional, the new minimum and the leading edge. And then I think the traditional, everyone is well aware, you have the default five, six, now 6.6 default hold. And then at some point, the deal team says, let's go, we want to sell. And then you execute.

28:31Frederyk Schroeder: The new minimum is more like a structured method review, what we call the preparedness assessment, so to say. And then the leading edge is actually having a portfolio-wide exit governance quarterly committee challenge, AI-powered rediligence. I mean, that's a big word, but essentially what it means is just looking at the portfolio asset to then do a rediligence on it to see if it's ready or not.

28:57Jelena Bauer: So Yelena, what are you seeing in terms of exit governance? Is there a shift toward a broader, more structured approach across the portfolio?

29:04Frederyk Schroeder: We have interviewed, I think, 20 or 30 PE fund executives, everything from small to mid to large cap, and asked them, how do you actually do exit governance these days and it's quite interesting because 40 % actually say they do not really have a structured approach and so what we mean with no structured approach is there is not a committee that you know is getting there every three months we're also from a from a fund management level you review so it's not just deal team wise but actually from a fund management level to then also flag certain risk flags is there an AI risk flag Like, I mean, Kai just mentioned an example earlier, where an asset that 12 months ago was perfectly fine, then slightly slipped because AI became stronger and stronger.

29:50Frederyk Schroeder: And that actually meant for that asset, it was deteriorating and what it could be offered for, etc. So our guidance is just, especially if you're from a fund and listening here, really think about how you can actually improve your exit governance. And I mean, that might come at a cost, especially when you're a deal team member, that might mean you actually need to justify why you would keep a certain asset or put up for sale or actually put up for an exit assessment. And we actually see that for the whole fund, it absolutely makes sense.

30:26Jelena Bauer: Thank you, Jelena. And Christian, how about the fourth lesson, pressure testing exit readiness? What are some of the best practices there?

30:33Christian Habrich: It's a bit, you know, part of that governance, not to actually instate that to a certain extent, right? It sounds a bit like something you would just do. And it sounds a bit like also something that, you know, is common practice today. But, you know, what we actually really see is, you know, how important it is to really have a bulletproof equity story upon exit. In bulletproof, we mean it holds the scrutiny of all data points that need to be in. It holds the scrutiny of operational evidence. It holds the scrutiny of the buy side of any risks that might be arising, of changes in the market. And we have seen a lot of them recently.

31:19Christian Habrich: And with all of that in mind, if you think about exit readiness, we don't think of this as a task you take off. But we really think of this as part of the value creation upon exit. Right. Because and, you know, and we are confirmed by the facts. Right. So you see actually more than 90 percent of people that say, you know, if we have really assessed it, we really went for it structurally. If we really went deep, you know, and scrutinizing this, this really drives upside and uplift in what we can actually see in the in the exit multiples and the exit value. So beyond timing, there's also a big point around really being prepared properly.

31:58Christian Habrich: And I can't for this in a second, but I think Sean has a question.

32:00Jelena Bauer: Thanks. This conversation has raised a few more questions for me. First, why wouldn't this always be done? It seems like a no-brainer. Is it simply too much work? And then what role is AI playing here in supporting this? Are there AI or other tools that you're seeing that can support the work that's involved?

32:17Christian Habrich: No. Yes. So the question is, why would you not do this? I think the first thing is on the timing end of things, right? So I think what we traditionally have seen is something that happens six to 12 months ahead of exit. However, you know what you then actually see and, you know, that is related to the AI operationalization, then probably more than to the tools you could apply. You know, this is actually something that six to 12 months oftentimes is not enough time to really respond to risks, to really craft the storage or really create those, you know, buyer level proof points, investment grades that really bring you to an exit.

32:51Christian Habrich: So what we then actually say, and that is one thing, you know, and I come to the second part of the question in a second, right? But, you know, what we then actually say is, you know, the minimum you should do is you should sit as deal team on fund side, 18 months ahead, right? And really pressure test this. We see also many clients, honestly speaking, we see also a lot of clients that do that on the way, right? But, you know, from the sales side to really 18 months before, really doing your own assessment, really challenging yourself, we see this being the minimum, right? I think if we think about best practice, though, and we have seen that and, you know, we've started also do this, you know, more with clients, and that's actually pretty interesting.

33:30Christian Habrich: It's really almost going to a full by-side view, right? To really take out an external lens or a different team that it's not as close to the asset and really going into this with a by-side view. So what questions would you really ask yourself if you were to acquire this asset now? And, you know, what are the questions you would want to have answers? And this puts you in a position to really identify those objections that could come and you really craft a plan for the next 24 months to really tackle this and to really bring all of that in an order that makes a lot of sense. Now, how could AI tools support you on that way, on that journey?

34:07Christian Habrich: Of course, a lot, right? Because, you know, we all know how well they function. Still, you know, we would say, you know, in a bit of a combination of really also getting in market voices and really coming into, you know, doing some really deeper, you know, views on the market and really pressure testing of the questions that you get asked by Claude are, you know, really doing the full job. I think that is something we would still say has a lot of value. Of course, it helps. It supports us all in all diligence processes these days.

34:36Frederyk Schroeder: Maybe to add to this, right? What is quite interesting is, let's say, out of this exit readiness comes out that market is difficult yeah so i mean we also recall everyone calls like red flag reports etc so whatever it is that gives you a list of things where you should work on or where you should find some sort of proof points yeah so kind of like re-engineering what you need to still prove the next three years so let me give one example with market right so what we hear quite a lot is well this is a great asset but we're not sure the buyers actually believe in the market so then one outcome of this exit readiness actually would be to write a short market report not a full-blown vdd that you're only two years down the road but actually a market where report where you yeah where you select or you collect proof points on the growth going forward where you collect proof points on the competitors so that then also the fund and the management have something that they can actually take to potential buyers in the very first discussions so that you know um if they then get told or the market is kind of like dead anyways and obviously no no here's actually the proof points why it isn't why don't we uh we engage in the conversations yeah so this could then actually serve as a conversation starter or continuing conversation yeah maybe bringing it

35:54Kai Vollhardt: together right i think as you know i mentioned i think in getting the first few right on questions do buyers believe in the market i think that's what where we see ai can help us get built the view on exit readiness a lot faster, but it allows us to then also spend more time or would allow you to spend more time on the meaty topics you really need to get to. On the VDD we recently ran, we ended up spending more than half of our time working with the data and IT team because we figured out there's a key proof point in the exit story, which relies on upselling in a new product. And the data structure simply did not allow to prove it.

36:29Kai Vollhardt: And I think spotting these challenges, being able to work with the team not five months before exit, but 24 months before exit, I think that's where you really want to get to.

36:40Jelena Bauer: So I'm hearing that managing exit readiness requires a real focus on allowing the right timeframes to assess and close gaps if you find them with a longer proof period than what we would have traditionally seen. Is that right? Yeah. So 24 months before exit, you have still a chance to think about your value proposition, to think about the proof points you need.

37:02Christian Habrich: Five months, as Frederik said before, it's potentially too late. So, yeah. Yeah, that's why you see actually this, you know, a good exit readiness assessment is, you know, the starting point or the immediate segue from four to five, right? So because there you identify and, you know, that's what's come through in all the stories that my colleagues have just told. You know, you actually come up with something, right? You come up with some sort of finding. And, you know, that actually gives you focus. It gives you real focus for the management team to really understand, you know, what will matter in all the initiatives.

37:36Christian Habrich: and there are millions, right? You know, as a manager, you know, managing a portfolio firm is a very challenging job, right? It's a high value task that you really need to nail. And, you know, to have focus, then also which initiatives can go wrong in the next 24 months or which you really should put some focus on. What are those things, you know, that really are important and getting also a bit of an outside view to your company in this very moment, you know, helps you to determine how does my short-term value creation look like? And that's also where we see right now a lot of, you know, with everyone who does this, you know, there's also coming a lot from it, right, to really, you know, jointly understand, you know, wow, there's one thing we really should spend the next six, 12 months on, be it on AI initiatives, be it on commercial acceleration, on other elements that really help you to make a case.

38:27Christian Habrich: And this is then really the starting point to really have that last mile type of value creation going from this exit readiness assessment.

38:36Jelena Bauer: And as is often the case right now, all roads are leading to AI. So let's dive into that final lesson, translating the AI potential into a credible value story. Christian, can you take us through that?

38:49Christian Habrich: Exactly. It has come through. I mean, it's everywhere. We all know that this is a very important thing. And obviously it plays a massive role in exits. We have that also in previous questions. And, you know, I think this is only natural. I think, you know, I think the first thing is, you know, also data says, you know, this will be important in the next couple of years. Nobody can evade the topic. So I think everybody knows it's critical. It's important. And, you know, we think, I think the one thing we need to take away is we cannot just take a storyline on AI at face value and hope that we'll do the job, right?

39:27Christian Habrich: I think where we actually, and we are in a transition phase right now, where the first things, you know, last year, everybody tried a lot. A lot of things didn't really fully materialize yet. And I think we are in a transition phase where this has to become the case and where this is really critical for both the exit story, but also then for the underwriting of the next deal cycle. So how much can you believe in this versus you've treated it as upside? So it's also a valuation question, ultimately. I think if I think about it quickly, I think the bare minimum is everybody needs to have a defense story.

40:04Christian Habrich: right so you know i think this is crystal clear if you go it you know and we had a couple of cases beginning of last year and so on you know where you there was potentially a bit of naivety around this if the this doesn't fly so you need to have a clear answer why is you have a defensible mode in your business model which is not going to be made redundant over the next couple of years why this will hold by what is proprietary why value workflow stickiness where do you actually have customer relationships that really are more important. It's literally that you really have a defense story. And then I think on the offense and upside story, I think this is an interesting one, right?

40:45Christian Habrich: I think the bare minimum without this, you really cannot also across most industries, you cannot go into Nexus processes. You have a very clear roadmap with very clear KPIs and a very clear plan crafted with some initial things coming live. So I think this is really the minimum. But this is still hard to underwrite. Because this is actually, you haven't seen proven facts. You haven't seen the impact somewhere. Which actually then you ask yourself on the buy side, will we underwrite this fully? Can we only underwrite part of this? Do we believe that management can really execute against this? So a lot of questions.

41:22Christian Habrich: So the minimum is that, but it's still a difficult place. I think ideally, an ideal word, you go into that process with already some clarity on what you have already executed, not only necessarily, by the way, on productivity or efficiency, but maybe also on the product end of things, where you really have brought something live, where you really have something to point to, where you actually say, of course, there's more upside. Of course, there's more things to do. However, we as a team have proven we can actually get some of that stuff live. And I think this is something where we say, if we talk about leading edge and how you treat this, I think the focus should be to get to exactly that state once you get into an exit process.

42:05Frederyk Schroeder: And maybe to add some case example, right? So, I mean, essentially, we like to run these, let's say, AI strategy engagement. Let's say we do them two years before the exit because that is actually optimal. It always says, yeah, three, so to say, things. The first one is actually the vision. So what is my AI-driven vision? if it's a tech product company then obviously that needs to be fully embedded in there then number two it's kind of like the roadmaps that christian mentioned and really like across each function that is relevant so that could be marketing that could be sales that could be products or whatever it is where you know you see the biggest value pools being at risk or actually being able to get in terms of efficiency what is on the roadmap and then actually having you know started to get going so that is number three what we call team tech data so have you actually started to get going and actually implemented some of these use cases and so i've seen clients that then said you know after this roadmap was quite great now we're going to hire 20 people and we're just going to execute on it because we want to get ready for transaction fast and hence they spend half a year with 20 internally newly hired folks which is quite easy depending on which location you're in because AI talent is obviously in demand, but still there's also a lot out there right now.

43:22Frederyk Schroeder: And then they added a bunch of externals to really make sure that they get these critical use cases or journeys, so to say, implemented. And then there's a tech and data piece is really around making sure your data is in a position to actually be used for AI. So let's say if you need certain contracts, if you need certain customer data, whatever it is, it needs to be in a certain type of format that it can actually be used. and so when you then can actually prove certain use cases running on it then the next owner will also be much more comfortable underwriting the next five use cases in let's say the legal function the finance function whatever because they actually have seen it worked and so these are kind of like the the three items that we always try to hit in the so-called ai strategy and then the earlier you start with it the easier you have the proof points and when it comes to pnl impact Well, if we talk about efficiency, actually having the FTE out, when you talk about FTE efficiencies will help.

44:21Frederyk Schroeder: The same with the growth. If you've actually been able to show AI-enabled growth, let's say with B2B sales, that will actually help a lot in the story later on.

44:31Jelena Bauer: Thank you, Yelena. That makes a lot of sense and certainly gives some tangible AI-focused actions for our listeners to think about. Christian, as we come to the end of our time together, I was hoping you could share some concluding thoughts, especially ones that our listeners could act upon in the immediate term to improve their exit prospects?

44:50Christian Habrich: Yeah, look, I mean, I think we have we've touched upon it earlier. We think we're strongly believing that the six lessons should all be implemented right now. But, you know, I think it's still that's taking away three things that actually makes sense, you know, next Monday or, you know, if you have any way not already started. Right. I think the One thing is really coming back to that notion of exit readiness assessment. We believe this is something to really look through. Where would it make sense to try it out, to see what the value is, both for the fund and the management team, you know, what you get out of this.

45:22Christian Habrich: This is actually something we can only encourage you to try, because I think it's actually something extremely valuable. And I think the other one, you know, I think, I mean, the question is out there anyhow. I think taking it seriously, really thinking through, you know, how can you actually go into real, you know, execution mode on AI, especially if it's not that far out. And if you actually have a bit of a maturing asset in the portfolio, what are the questions to answer and what can you do now to actually have a strong, you know, story to tell, you know, at the end? And I think lastly, also asking yourself, do I miss any capabilities?

46:00Christian Habrich: Both on the orchestrating from the front perspective, this entire journey around exits. Maybe secondly, and we see the increase of the broadening of operating partner teams. But I think having to have the right capabilities to support also the companies all along the way. And then lastly also, and that's true that in the portfolio firms, do we have the right capabilities to really prepare ourselves for the exit, but also to do what it takes to have a really strong operational story towards the end. I think these are the three things I would highlight.

46:34Jelena Bauer: Wonderful. This has been fantastic. Christian, Frederick, Jelena, Kai, thank you so much for taking the time with us today. It was a real pleasure.

46:42Christian Habrich: Thanks for having us. It was a pleasure. Thank you. Thanks a lot.

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