Markets Discussion Live from Kiawah: Exit Overhang, DPI, and the Road Ahead

Podcast: PE Pathways
Episode: Markets Discussion Live from Kiawah: Exit Overhang, DPI, and the Road Ahead
Host: Jeremy Levy
Guests: Jason Wolfe and Joe Conlon
Recorded: October 14, 2026
Aired: November 9, 2026

Jeremy Levy (00:05):
Welcome, everyone, to our second live recording of a PE Pathways episode. My name is Jeremy Levy, a partner in our private equity practice, and I had the privilege of leading our first live recording at this event last year.

PE Pathways is our podcast series where experienced dealmakers share their thoughts on current private equity and M&A trends and developments. We’ve established a good following on our episodes, which are available on our website, troutman.com, or wherever you subscribe to your podcasts.

Today, we are going to have a discussion around where we have been, where we are now, and where we are going in the M&A market. In the weeks leading up to the cut, we asked some of you in the audience what you would like to hear about. The first three people I asked said anything but AI, so we will try to keep that a little bit on the down-low. But we did ask two of our clients to join us and share their thoughts on those questions that were crowdsourced, in a way.

So please welcome Jason Wolf, Managing Director and General Counsel of Susquehanna Growth Equity, and Joe Conlon, Managing Director at Hastings Equity Partners. Please tell us a bit about yourselves and your firms before we begin. Start with Jason.

Jason Wolfe (01:19):
Sure. This is the podcast?

Jeremy Levy (01:20):
It is a podcast.

Jason Wolfe (01:21):
Oh, man. Well, already we’re off to a good start.

Jeremy Levy (01:24):
Live recording.

Jason Wolfe (01:25):
I’m trying to be Joe Rogan here, so if everyone can help out, that’d be great. Jason Wolf, Managing Director, General Counsel of Susquehanna Growth Equity. Like you said, we are, obviously, a growth equity firm. We’re focused in technology, mostly, but we also have a mid-market buyout practice. So this last year for us has been the SaaS-pocalypse, internalizing that and dealing with that and trying to find some conviction to go out and do some new types of deals.

Joe Conlon (01:52):
And Joe Conlon with Hastings Equity Partners. We are a lower middle-market industrial firm focused on primarily mission-critical services around labor, far right of Matt’s presentation, AI, industrials, data center build-out, focused primarily, as I said, on labor. Been around for about 20 years, splitting time between Boston and Houston.

Jeremy Levy (02:16):
So let us start with where we’ve been and where we are. First, as Matt just said in his presentation, the exit overhang has been with us for a while now. According to a Bain study, a majority of buyout assets in the market were acquired in 2021 or earlier, which, of course, was at the end of a decade of multiple expansion. So first, how are you thinking about your aging portfolios?

Jason Wolfe (02:46):
Aging portfolios, aging bodies, yeah. I don’t have a lot to offer besides my own pessimism, but I… We’ve been experiencing this. I think everybody in the room probably has been experiencing this. It’s just harder to sell stuff. And it was really great when there was zero interest rates on borrowing a bunch of money. That was great. If we can go back to doing that. That’s not going to happen. So we’ve been having, I think for us, it’s been a mix of trying to retool the businesses a bit to treat them not as these amazing, “we can flip it for three times our money in five years,” and trying to retool it to start producing cash in the interim, doing that, which when you give people money and you tell them they’re great and they’re amazing founders and CEOs and they’re going to have this great company and then you tell them, “Just kidding, you got to start milking this thing for cash,” those are hard conversations, but they’re conversations we’re having.

So that’s sort of one approach. The other one is just like, you know, it’s like anything, as long as you… Things will change. There’s always a moment for all sorts of assets. So as long as you are maintaining the asset and doing the right things, you have to be patient. And really, sadly, that’s kind of all we’re really able to do at this point.

Joe Conlon (04:06):
I think we agree with most of that. We see a few different things in the buyout space potentially than growth, where the interest rates are actually impeding our ability to grow. So holding it and being patient in a couple of cases is actually leading to a lack of free cash. So if you started with a reasonably leveraged deal, rates go up by three points, you reset at some point down the road, it’s really difficult to grow your way into that patience.

So that’s where I think we’re a little bit stuck with the reality of the overhang and the actual opportunities in front of us. That’s not… You know, if you have 10 companies, that might be two of them, but we’re seeing enough of that in the market, I believe, that it’s going to take some creativity along with the patience. We’re going to have to swallow our pride, get together with other groups in the room, figure out how to have a joint exit as opposed to having six good investors in the same market trying to compete for the exit. Forget the on-the-ground actual operations competing, but competing for exits is becoming a real challenge, I think, in the middle market, or especially at the lower side.

Jeremy Levy (05:06):
With respect to actual exit transactions, let’s talk a little bit about that. I mean, we in our experience, we are seeing, at least over the last 12 to 18 months, we’ve seen a lot more busted processes. We’ve seen a lot of processes that don’t get started because you get an initial read from a banker and you’re not going to trade that at a valuation that exceeds the mark that you’re looking for. So why do you think we’re seeing those disconnects between buyers and sellers in the market?

Jason Wolfe (05:37):
I mean, I think for a lot of assets… I mean, again, we have to talk about AI. Sorry, we have to do it.

Jeremy Levy (05:44):
Just a little bit.

Jason Wolfe (05:45):
Yeah, I think that’s kind of messed up everyone’s conviction to do certain types of deals. Everything has an AI risk, right? You could say there’s AI tailwinds for certain businesses, I guess, but very few of them. But everything has an AI risk. Everyone’s concerned about it. What does it mean? And nobody knows. And when people don’t know, then people get fearful. Deals are priced, you know, it’s harder… Again, the cost of capital is different, it’s harder to borrow money to do these deals.

The good businesses still sell. You can still find buyers for those, but it’s not like it used to be. You’d have three or four people at the finish line showing up for these things, and now you’re lucky if you have one. And for us, it’s been really focused on trying to maintain that competitive tension and sort of tactics and strategies to get more than one person to be there, because you can’t count on the one person anymore. It doesn’t really work.

And the… You know, norms sort of break once on the way up and once on the way down. And so we’re on the way down now. So the norms breaking of, “Oh, we’re going to sign a term sheet, we’re going to close the deal.” You do a call with the fund and, “Are you guys serious?” “Oh, we’re serious. We always…” That’s not happening right now. People are just walking from things. So, yeah, it’s been a real challenging environment. I don’t know what you’ve seen, but…

Joe Conlon (07:07):
The same. I think the point of having a single buyer is really the key risk in the market. And a couple of banker friends here that I think can attest to that. Ten years ago, we would have had buckets of five people that had conviction about a deal that you would say maybe had a strong bid. And now we’re seeing that maybe one or two have a spike bid, and they’re very particular about what their angle on that deal is. And underwriting to that and continuing to evaluate that is really difficult, whether it’s AI or so much of the growth in our economy is based on large-scale construction projects right now.

So if you have large data centers, large infrastructure projects, the question is always, “What’s the next one?” So especially on the industrial side, if you’re in data centers, that’s the only sector that’s really going to be taking off. Refinery maintenance is zero right now. People are enjoying their profits. We were talking about that last night a little bit. So if you’re in the data center world, that’s great. And the first question from the buyer is, when does that stop? So there’s just the risk of writing a check from the buyer side, I think is so great. And then when you add the rates on top of that, generating free cash for 10 years is really difficult to predict in this market. And the modeling just breaks.

Jeremy Levy (08:23):
Let’s talk a little bit about LP relationships in this kind of world, because obviously fundraising dynamics have shifted. Q3 fundraising year to date is down 10% year over year, according to PitchBook. Honestly, that number seems a little bit more sunny than I’ve been experiencing or seeing with our clients. Joe, I’ll direct this one to you. What are your LPs asking for these days that they weren’t two or three years ago? And how has that changed the way that you’re operating and interacting with them?

Joe Conlon (08:56):
Yeah, I think the biggest… It’s not that liquidity hasn’t always been important, but that’s on the top of every question. You put a capital call, they’re asking for when liquidity is coming from something else. They used to be allocating fund to fund, understanding the call and distribution cycle, and there’s no tolerance or patience for that at the moment. So DPI is probably the constant conversation that wasn’t there 10 years ago. Ten years ago it was IRR, five years ago it was MOIC, and today it’s, “Have I received cash?” The returns are great, they will come, but if you can produce cash returns today, that seems to be driving every conversation.

I think in terms of fundraising, we’ve had conversations with our peers over the last few weeks just randomly on the topic, and that is what they’re… You know, one of our peers is leading with in a Q1 raise. I think you’re seeing fundraising being down 10%, but the number of funds, as we just saw, raising is a third of what it was at the peak. And the aggregation of assets underneath large managers is really sucking money out of the market for everybody else.

So I would say for us, if we don’t have to raise right now, we’re not going to raise. It doesn’t make sense for us to go out into this market until we actually have put out the DPI and produced returns and then ask for a portion of that money back. It seems to be, at the lower end of the middle market, a pretty steady strategy that I’ve talked to a lot of people about. But liquidity is concern one, two, and three. Valuations and returns are in the conversation, but way down the list these days.

Jeremy Levy (10:25):
Has that changed how your internal reporting has been functioning as well? Are you looking at different… DPI is front and center. Is that how you’re operating with your capital calls and your internal reporting to your LPs?

Joe Conlon (10:40):
It has changed how we’ve thought about capital calls specifically, making sure that we provide more notice. We’re communicating more clearly about what we’re after, why we’re doing it, what’s upcoming, giving people… We don’t have that much lead time on a deal, because you don’t know if it’s going to happen. The last thing you want to do is have a call 90 days in advance saying we’re looking at something. But getting in touch with them early enough so that they can plan those calls, and then on the other side, leading to the stalling out of the market a little bit, trying to figure out other ways to monetize our investments.

So being a little bit more creative about monetizing investments without giving up control or structuring a sale the right way, I think is definitely top of mind. And entering deals not thinking about necessarily how to exit, which of course we all think about, but how can we generate free cash flow on that deal? I was shocked to see the number of… You know, the leverage number going up towards 5x. 5x in an 8% to 10% environment at the lower middle market, that math doesn’t work.

Jason Wolfe (11:37):
Super bad.

Joe Conlon (11:38):
Yeah, exactly. So if we can stay down at a two-and-a-half to… You know, two to two-and-a-half level on leverage in an asset-light business, which I think we might be one of the few in the room that’s still excited about asset-light. The asset intensity seems to be a little bit more prevalent for the lenders these days. But we can generate enough free cash flow, and I think that’s where our focus has been the last year, looking at deals that can produce returns without an exit.

Jeremy Levy (12:06):
Is there any thematic feedback from LPs? Are they saying similar things about the current market?

Joe Conlon (12:15):
I think there’s a divergence in the market from the maybe a dozen conversations I’ve had with LPs, where some of them are very consistent allocators every year, and they’re really struggling trying to figure out where to put it. They recognize the lower middle market is where they want to be. The conversations that we’re in obviously are tied to that. They can’t figure out how to actually do it, because we’re not deploying capital fast enough, because the backlog of deals comes all the way down to deployment as well.

And then on the other side, we’ve had solid institutional investors say, “I just don’t want to see this until I’ve seen returns from everything in the sector.” So they’re looking at total exposure to a sector as opposed to annual vintage allocation like we would have been talking about 10 years ago.

Jeremy Levy (13:04):
Let’s switch to the buy side now. Cost structures and margin pressure. As you just described, financing costs are very much alive across most portfolios. In this environment, how have you changed your approach, if at all, to underwriting for new deals and value creation during the course of your hold period?

Jason Wolfe (13:25):
Underwriting and diligence is back, baby. It’s all back. So what does that mean? It means you go out and you do a lot more work to build conviction. So we’re definitely… It’s just taken longer to get deals done. You got to do more work. You have to have a much more fine-tuned projection of what you think this business is going to do. You need to show up with all this stuff. Used to be like, “Oh, well, we’ll do this in the first six months or a year.”

Now it’s like you got to… It has to be ready on day one for all of us to feel comfortable to support the deals that we’re doing. So it’s just kind of pulled forward a lot of that stuff, which is good. I mean, that’s… You know, for a long time, it was… Well, it was, you know, you buy it, you hope someone’s going to pay a couple times your money for multiple expansion, and that’s great. But that’s been for us just laser focus more on doing the underwriting, the diligence, and spending more time on the deals, which everyone’s doing. You can see it in our sales processes. They’re dragging out. It’s like, “Well, why?” It’s because everyone’s doing the same stuff. So.

Joe Conlon (14:44):
Yeah, the same for us. I think in the buy-and-build sector we’re in, we have probably half buy, half roll-ups. We used to be able to hand that off at 70% done with a roadmap to the future, and now that work has to be completed. So we have to be able to underwrite actually executing those changes throughout our hold period, which… In buying, we do all founder-led deals. So there’s a lot of transition that has to happen. And I would say the core of the middle market is looking for that to be completed in full prior to.

And then the other part that we’re underwriting that’s a little different, which sounds crazy given we’ve all been through it the last few years, but in an inflationary environment, there’s no one in this room that went through the last one, really, right? So we’re trying to figure out… A dollar increase in price doesn’t drop to the bottom line anymore, it’s offset by $1.20 of cost increases, and none of our managers at the companies are prepared to budget that way. They’re not expecting the price increase to be the same next year as it was last year. They can’t imagine how their raw materials could go up another 5%, or 50% in some cases.

So trying to get people adjusted to the sensitivity of margins and understanding the cash impact of a 2% increase has dominated our conversations for the last 12 months. And I think it has to come further back into the underwriting to really be effective. And that’s a challenge because, again, at our size, the founders haven’t prepared a budget. They’re just… They know at the end of the year they made more money than they made the last year. That’s a good year. They’re shocked by the changes in the vendor mix. They’re shocked by the supply changes. So trying to prepare them for that during diligence is really difficult, because they don’t have a track record or history to look to.

So to your point about conviction, it doesn’t matter which deal it is. In an IC meeting, it’s very easy to be the guy that just says, “That doesn’t work.” And it’s really hard to be the one that stands up and says, “But it has to.” So I think it’s very difficult for our team to get a deal across the line because of that. And we have to work on ways to underwrite to get deals done, because at the end of the day, that’s the only way to keep the flywheel going.

Jason Wolfe (16:48):
Yeah. I mean, it used to be our sales processes with people on the buy side would be sunshine, and now it has to be a little bit of clouds and rain and stuff. And it’s just harder conversations to have.

Jeremy Levy (16:58):
Yeah. That’s contributing to what we were talking about earlier, right, with more busted processes. I think it’s difficult for a seller to hear that a buyer is going to walk away from a deal because the buyer isn’t able to forecast price increases that are going to stick some years down the line and compete with inflation. So it can be difficult. Have you, in your modeling, in your underwriting processes, have you changed the way that you’re modeling, say, your base case? Is your base case different than it used to be years ago? Are you setting those numbers at a lower level?

Joe Conlon (17:37):
We’ve always been pretty conservative, but I would say… We always thought it was conservative. Now we might think it’s real. So certainly… You know, our model is a slightly different model. If you have a seller rollover, you’re paying a fair multiple and putting modest leverage on a deal. The returns are through the value creation, not through the model itself. So it’s more about the achievability of the operational changes for us. So not too much has changed, but certainly in the market it has.

Jason Wolfe (18:06):
Yeah. We’re still underwriting to the same return. It’s just the aperture now for the deals that fit that is much smaller. So that’s always the trick, right? Do you change the model to have a bigger aperture? Do you make your aperture smaller and stick to your knitting and your modeling, or what do you do? And so that tension is always there. I think we’ve done pretty good sticking to just having a smaller aperture, deals that fit. So.

Jeremy Levy (18:30):
For the assets that are in your portfolio, have you changed anything about the way that you’re thinking of value creation? Like how many resources you’re throwing at it, how frequently you’re renewing your VCPs, like what, how are you handling that?

Jason Wolfe (18:43):
Yeah. We have our model for the portfolio value creation team, that’s what we call it, has always been like you ask for it, it’s not forced upon you. Even when we own the business, right, if you’re like, “I got this,” like we leave you alone. It’s whatever you ask for, you get. And so… And then the allocation of the resources is more about who raises their hand, right?

But we’re trying to find sort of durable ways to increase value, right? So for us, that was things like taking payments or embedded finance. That was a big sort of thematic thing we did for a while, and we’re still doing that. So that’s one thing to do. But trying to… In this current environment, I think what we’re struggling to do is to advise people on what the future with AI looks like in their business. Particularly on the revenue side of things, it’s very easy to say, “Oh, use AI, reduce costs, fire a bunch of engineers.” Your customer service is now virtual, like all that stuff’s very easy.

That’s not, you know. The hard part is how is AI actually making new revenue for you, besides putting a chatbot on your website and being like, “Look at that, that’s great.” So I think we’ve taken the approach on that, of just trying to tell people to incorporate it into their businesses, use it, have a top-down thing of everyone uses it, and then just take easy wins and then see what happens. And that’s kind of, that’s not great advice, but like that’s kind of all we have at the moment, if I’m being candid. So that’s been… The sort of theme of the last year has been that. So.

Joe Conlon (20:53):
We’re probably taking a little different approach. We’re a very active manager with small businesses and we have to allocate our time to where we think there’s going to be real input, or output, sorry. So when we think about value creation, we probably over 20 years have a couple of businesses that we built that just weren’t good investments. They were great businesses, maybe some of our best. And that lesson learned is we have to put our time where the return is going to be. So we’ve been pretty brutal about allocating our time to spots where we think the output will be worth the effort.

I know no one’s putting effort into things that they don’t think will be valuable, so that’s kind of a silly comment, but it’s… We’ve certainly high-rated that every quarter as to where we’re going to spend our time. And our team has been actively involved in trying to get revenue synergies from integrations or putting in new systems, rather than just waiting for it to happen or allocating funds to it. We find that the on-the-ground operation is so complicated today. The labor inputs are so expensive, everything is difficult. So we’ve been putting our team on top of that to get the extra efforts done. And I think that’s been successful over the last two years, to the detriment of a couple of our companies, probably, that haven’t received that love and attention. But I think overall for the firm and for our returns, it will pay dividends in a meaningful way.

Jason Wolfe (22:15):
Yeah, it’s interesting. I, like, the just throw bodies on it to grind out a return, you know, like, yeah, I… People do it, and it works for them. And I think for us it’s kind of learning that skill. We don’t really have that skill set. We never had to do that necessarily. But certainly people, very large asset managers have done that for years, and it is a real skill. So we’re trying to figure that one out.

Joe Conlon (22:41):
Yeah, I think at the lower middle market you’re building a business first before you can ever think about an exit. And there were times over the last 20 years that a buyer would come in and just take the project. They would buy a company that they thought was in the right market. Today, as I mentioned earlier, I just don’t see that as the opportunity. I think you have to be in a position where you’re selling a strong, healthy business. And for us, part of that transition plan is putting in those items that don’t need to be managed on a daily basis.

For example, we built an estimating system and platform for one of our companies. It’s a one-time event. They’re managing it. We’re not doing it daily. But it was something we had talked about for 18 months and just hadn’t found the time to change the way things were being done. So to take it out of the founder’s black box of tricks and put it into something that can be translated to another manager or a future buyer, we found that to be something that would be critically important for that specific business.

Jeremy Levy (23:36):
So let’s talk about who’s doing this well, right? Who is outperforming in this market? What do you think separates them? There is a… There’s a PitchBook statistic that shows that buyouts in the $25 to $100 million TEV band had delivered 39% IRR over the past 15 years. So when comparing the sort of lower middle market to the upper market, upper-tier market and higher valuation deals, this band was an extreme outperformer. I know that’s a controversial stat. And I’m going to drop my microphone.

Jason Wolfe (24:15):
Thirty-nine percent over 15 years.

Joe Conlon (24:15):
That’s pretty good.

Jason Wolfe (24:17):
Yeah, it’s pretty good. It’s pretty good.

Joe Conlon (24:18):
I wouldn’t be sitting here, I can tell you that. Yeah. We joked about this a little bit yesterday. I mean, 39% annually for 15 years is a little bit healthy. So I think… You know, I’d like to see the median on that stat instead of the average. But I don’t think there’s a doubt that the lower middle market is outperforming. But it’s expected to, right? It’s a higher risk profile. It forever has outperformed the larger end of the market. I think the challenge that we really see in it today is the competition coming from both sides.

So deals that size are driven by fundless sponsors coming up from the ground and larger firms pushing down, whether it’s for add-ons or new platforms. So this is the space that we live in and have stayed very deliberately in that space, and it’s much more competitive. The idea that the average multiple in this space is probably in the seven to nine times level for relatively small businesses that probably have some founder risk, that probably have some customer concentration, that probably have project risk or whatever else might be going on in this size, it’s not… It’s not for the faint of heart. And so I don’t think the 39, I’m still going to challenge that number, but you should get a premium. And I would expect that to continue, because the work that’s done at that level deserves that premium.

Jason Wolfe (25:41):
Yeah, I mean, we’re a growth equity shop, but we also do mid-market buyouts. Why do we do that? Because all the asset managers are pushing into our growth equity category, and they’re like, “Well, we’re going to push into the mid-market buyout category.” And now you’re telling me I can get 39% IRR in the lower mid-market? I’m going to go there next. Sounds great. Sounds amazing.

Joe Conlon (25:45):
Why don’t we do that?

Jason Wolfe (26:01):
Please let us know. It sounds great. But yeah, I mean, everyone’s kind of searching around a bit for conviction in the space, in an asset class, and any numbers supporting good returns in the lower mid-market, that sounds great. So.

Joe Conlon (26:16):
There are also transaction dynamics at that space that are different than the upper middle market. So this is likely still a founder-led business of some kind or a family-owned business that has other reasons to transact rather than a mark on a fund. So whatever they’re going through is still that life event that leads to a transaction. So there’s still opportunity to be had in this space versus, we can all extend our funds another year or hold on to another asset or explain why the market was soft and we couldn’t exit. So the volume of activity here and the professionalism in this side of the space, I think, is continuing to improve as we go forward.

Jeremy Levy (26:53):
All right, let’s shift focus to the future a little bit. Let’s take out a crystal ball a bit. Where are you seeing the most durable opportunities right now? You mentioned a couple of industry sectors in our earlier conversation. Where are folks investing? Where are you looking to invest? Where do you see the best opportunities, and where have we pulled back?

Jason Wolfe (27:16):
This is where I press the system of record, system of action, AI speak button. Yeah. But everyone’s trying to figure out what’s durable in software. System of record, system of action, system of system of whatever, you know? Oh, are you a graph database company? Or are you… Like, all that stuff. We’re really spending a lot of time on that. People are spending a lot of time on that. I don’t know that there’s any… I don’t think there’s any magic to it, but certainly everyone’s… Their thinking has certainly sharpened around all of that. Certainly anything in healthcare, regtech, government, govtech, that stuff is where everyone’s kind of looking right now, because you’re probably not going to let an AI do that stuff right away.

I don’t picture… You’re going to have, like, you know, we have trains. We’ve had trains for 200 years, just about. You still have a conductor on a train, right? So you’re still going to have somebody for these high-value, important things, the human’s going to be involved in the process. Even things like radiology, which you’d think like, I can look at this scan, right? I can do that, right? But no, they still need a person involved in it. So that’s been a real durable place that we think is a durable space. Everybody thinks it’s a durable space to put your dollars to work in, in the software space.

And then outside of that, it’s funny, it used to be for our business you would have software and then you’d have some sort of dongle or something associated with the software and you’d be like, “I don’t want that. That dongle, it’s hardware, it’s stupid, it costs money. I don’t want that.” Now that little dongle is the thing that makes your product sticky, right? So we’ve changed how we think about that a little bit. I mean, we literally looked at a business, and maybe somebody else in the room looked at the same business, but it was a software company, but it incorporated vending machines into their enterprise product. Like vending machines. And they were like, “This is great. A vending machine. This is… The killer app is a vending machine.” So that’s been a little weird just to try to think about different ways that products might be more sort of durable and sticky.

Joe Conlon (29:34):
We come at it from the opposite side on the labor side. So about 15 years ago we saw the gap in skilled trades and what was happening and we went all in on that for the last 15 years. So it’s been… For us, that’s highly durable. It’s construction. Everybody kind of gets that. You can’t get an electrician to the house, you can’t get a plumber to the house. So being in those sectors has been a good experience the last 10 years. I think now the challenge is if you’re paying an electrician $100,000 a year coming out of high school, there will be balance. Will it be next year? Probably not. But in the next 10 years, probably.

So what happens after that? And if each town collects or graduates a couple of apprentices a year, the challenge is going to be back to what I was saying earlier. A lot of our economy is driven off of these large-scale projects. So if you have a large infrastructure project with an AWS data center or something and you need 500 electricians, there’s not a town that’s going to be able to support that. So how do you bring those assets together? So coordinating and project management and quality, I think, is still going to be, to your point, a human touch.

Jason Wolfe (30:37):
Services are back.

Joe Conlon (30:38):
Services are back.

Jason Wolfe (30:39):
Yeah.

Joe Conlon (30:40):
And so that’s, I think, long-term durability will be there on obviously the physical act, but also the testing, inspection, and quality standards, safety standards. There are certain critical tasks that just won’t be turned over, and we’ve been focused on those, and I think will continue to be.

Jeremy Levy (30:58):
In the near term, obviously, we’ve got to get political for a moment. We’ve got midterms coming up. What are you watching? How are you thinking about the regulatory and deal-making environment and the outcome of the elections?

Jason Wolfe (31:11):
I think everyone’s view is like, “Well, the Democrats will win the House and then it’ll be a nothing for two years,” right? That’s the consensus, I think. He brought up an interesting point which is like, or, he’s like, “Or the next two years could see a union of… Trump could decide to try to burnish his legacy in some way, and so he works with the Democrats on a bunch of populist items on the table.” So that’s very possible, too, which I had not really considered that. And who knows, right?

I think in the current environment, you should just embrace… You should expect chaos and you’ll be quite pleased. So I hadn’t really thought about that, and I have no idea, obviously, if that would come to pass, but I don’t… I guess who knows? I really… It’s really hard to say. There’s certainly… You will not see any comprehensive legislation probably around AI or anything like that. So it’s just going to be, figure it out for yourselves and do whatever. Bunch of tweets, now it’s superintelligence, all that sort of stuff. But then as far as for what our business is, what this could mean, it’s just… I really don’t know. I don’t. I got nothing.

Joe Conlon (32:33):
Yeah, I think the best hope is stability, right? Just turn the calendar, get past the midterms, and then six months, then we’re going to be talking about a presidential election for 18 months. So I don’t know when that stability comes, but when we stop having a political conversation at every dinner, when we stop having an AI conversation at every dinner… These things aren’t going to be there, I get that. But trying to find that stability for our companies is critical, because it’s the uncertainty. If you just tell us what the rules are, we can all play within them. When I don’t know what the rules are going to be day to day, it’s really difficult.

So whether that’s tariffs on, tariffs off, whether it’s a supply base of data centers are going to be built, they’re not going to be built, alternative energy is going to be supported or not supported, doesn’t really matter which side of the aisle you’re on. There’s an issue for everybody today, and we have to figure out how to get those issues to be suppressed in order to get our economy back going and have the labor pool actually pointed in the right direction for the next 10 to 20 years, not 10 to 12 days at a time.

Jason Wolfe (33:37):
Yeah, I mean, treasury yields are going to go up, right? I mean, they’ve gone up, they seem like they’re going to… We don’t… There’s no indication of any sort of slowdown in spending, or any even embrace of the fact that treasury yields going up might be bad and might be a signal to do something different. So I think we have to anticipate that that will increase, which is… I mean, it is weird. The lobbyist also was pointing out that there could be a break actually between mid-market leveraged loan and treasury yields. You think, “Oh, it’s all treasury yields.” Well, actually, they could go different ways. You could see the US as a completely different asset class and crappier than lending to American companies, which apparently you’ve seen in other places in the world. So I don’t know.

Jeremy Levy (34:26):
I mean, if stability is what we need, and I think we all understand that, in a way gridlock would be helpful, right? I think if you look historically, the more gridlock you have, the more stability you have, and that’s good for deals, right? It’s easy to do deals in an environment where the two political parties are just stopping each other from doing anything.

Joe Conlon (34:37):
Yeah.

Jason Wolfe (34:48):
Unless they’re trying to fire every Fed governor for mortgage fraud. I don’t know, like it’s… Yeah, I mean, it’d be a different type of gridlock for the next two years, right? It’s going to be a very distracting gridlock in a way that we probably haven’t seen.

Joe Conlon (35:04):
And I think the gridlock we’ve seen, we can point back and say that that’s it, but is it correlated or not, or is it the causal effect? I’m not sure, with the rate environment being the key driver. So in a low-rate environment, having gridlock was great, because it kept everything where it was. To your point a minute ago, the fact that nobody is talking about fiscal responsibility in this cycle of elections with rates where they are, with the debt where it is, it’s kind of crazy. So that’s not going to be a populist message. It’s not going to be a winning message. So we’re not going to see that in the next two years for a presidential election likely either.

So I think we have to settle into this position that we’re going to see rates continue to go. I don’t know if they go to a breaking point or not, but there’s no evidence that they’re going to go down. And we had a conversation with a strategic from Europe last week that was just a fascinating topic for me in terms of their borrowing rates versus ours. A large European conglomerate is borrowing at four and a quarter percent all-in, and we’re talking about SOFR+450. So there’s a huge split there where we could see European lending, we could see a split in the market, we could see a diverging rate environment. Those things I think are all unknown over the next few years, but we saw this a little bit with Japanese banks lending years ago, and we may see it coming from international markets as well.

But I don’t think an international lender is going to put money into a US company. I mean, I’m sure it’s happening, but I mean at… You know, on the normal level with the instability that we have. So until we can clean up kind of just the steady rules of the game, I think it’s going to be a challenge.

Jeremy Levy (36:44):
How are we going to do that?

Joe Conlon (36:45):
I thought you had it. In our prep session, you said you had it.

Jeremy Levy (36:48):
It’s on the back of this page. I got the answers, but we’ll pass this around at the end. So final analysis, where do you see us headed? What does your outlook look like?

Joe Conlon (37:01):
My take is we’re having the same conversation for years, I think. The number of funds discussion that every year the number of funds is lower and lower. We’re talking about 40 less funds raising. We need to see zero. We need to see a real change in the market and have less managers to actually see the opportunity to divest assets, to have that be forced. The idea that we’re extending beyond our LPA terms, beyond 10 years, beyond two years of extensions, doing a CV for six years, some of these assets are going to be career-worth duration. And I don’t know how we actually have a different conversation until we start to force that.

So Matt had a slide that talked about the buyer and seller expectations of value, and if I have a good asset, I’m not willing to sell it at a discount. If the buyer doesn’t value it, then I’m saying the buyer is wrong. I mean, that might just be what the market is. And at some point we have to be realistic about what the value of our assets will be. There’s very little motivation for a private equity manager to be realistic about that. So until you’re told that you have to get something done, you can find an excuse, or I can go do another add-on, or I can expand into this, I can replace the CEO. And all the excuse-making has to stop at some point when the clock runs out. And until that happens, we could have the same conversation next year and probably three years down the road.

Jason Wolfe (38:26):
And when the clock runs out, you just do a continuation fund, right. I mean, that’s been a change, right? Fifteen years ago, the zombie funds after the Great Recession, they stuck around for a while, but the continuation fund market is just humongous now. It’s enormous. So that’s definitely put sort of… It’s kind of steroids for the… It’s kept us on life support for longer for a lot of assets. So that’s not, we’re not internalizing necessarily the pain of that, because you can just offload this stuff at a NAV discount and move on. So yeah, I mean, we’ll see what those vintage deals look like. I’m going to assume bad, but I also don’t know, we’ll find out. We haven’t done one, so I wouldn’t want to be an investor in that space.

But that’ll be an interesting next sort of phase of this is like, will that market continue to be this alternative off-ramp for funds or not? And if that goes away, then it’s going to be very challenging. So I think you will see managers go out of business at a rate we may not have seen for a while.

Jeremy Levy (39:33):
Well…

Jason Wolfe (39:34):
Cheery.

Jeremy Levy (39:35):
I wish we could end on happier notes.

Jason Wolfe (39:36):
Do you want to start pouring Bloody Marys out at this point?

Jeremy Levy (39:37):
Yeah, we can do that.

Jason Wolfe (39:39):
It’s grim.

Jeremy Levy (39:40):
Well, thank you both for being willing to come up on stage and share your thoughts.

Jason Wolfe (39:43):
I was told I had to do this. All right.

Jeremy Levy (39:47):
You didn’t have to share that part.

Jason Wolfe (39:48):
Okay.

Jeremy Levy (39:50):
Thank you to our audience as well for listening today. We will be posting this episode next on our feed. Feel free to check out our other episodes on our website as well, or wherever you get your podcasts.

Jason Wolfe (40:01):
All right.

Jeremy Levy (40:02):
Thank you.

Jason Wolfe (40:02):
Thank you.

Jeremy Levy (40:02):
Thank you very much.

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