The 2.5x exit hurdle, AI token blowouts, and underwater common equity

THE CARRY

1. Cross-Podcast Themes

Unconstrained AI Pilots Are Bleeding Cash

Uber blew through its entire annual software budget in four months because variable token consumption breaks traditional SaaS predictability. Justin D'Onofrio notes that uncontrolled model queries are destroying mid-market margins, forcing finance teams to "budget for the outcome" rather than treating AI tools as fixed-seat licenses. Watch full episode

At the portfolio level, Goldman Sachs Asset Management is pulling the plug on open-ended pilots. Michael Bruun requires CEOs to map every enterprise rollout to a strict financial hurdle, commanding that initial deployments must focus on scaling revenue or "expanding EBITDA margins." Watch full episode

Allocators Replace SaaS With In-House Code

Institutional LPs are dropping off-the-shelf vendor suites entirely to fund bespoke internal code development. Matt Bank at GEM flipped his firm's software spend from 90% external to 90% internal in just twelve months, building internal data search engines to "drive internal data query and retrieval costs across historical firm files to zero." Listen to the full episode

The Return of the 2.5x Exit Hurdle

A junior deal team recently refused to sell an asset, holding out for a 3.5x return that no longer exists in a normalized rate environment. Young Lee highlighted the disconnect, noting senior partners had to step in and mandate the sale because “if we can get two and a half X, get out.”▶ 12:51

Continuation Vehicles Lose to Corporate Sales

Sponsors trying to manufacture that lost upside through complex continuation vehicles are losing to clean corporate sales. Michael Bruun observed that strategic buyers routinely outbid secondary funds for assets with unified data architecture, providing sponsors "their cleanest path to real distributions."

Multiple Compression is Wiping Out Common Equity

An operating team can add $400 million in enterprise value and still walk away with nothing at exit if preferred equity hurdles run unchecked. Ryan Milligan points out that when multiple compression hits, “the preferred equity is often growing at 8%”▶ 19:13 and rapidly drowns the management payout.

Direct lenders remain mathematically insulated from this valuation crush while sponsors carry the bag. Kipp deVeer noted that software assets bought at 20x EBITDA were only leveraged at 6x or 7x, leaving the damage entirely on the equity owners because “it's more of a problem for the owners of some of these assets than it is for the lenders.”▶ 9:32

2. Best Of the Week

Capital Allocators: Abby Barlow dropped document review cycle times from three days down to a single minute by grounding Claude in her firm's "institutional memory." Read more

Dry Powder: Ares built a 150-person private wealth sales team to push institutional direct lending into wirehouses rather than launching "dozens of niche retail products." Read more

Fund Shack: Target companies are feeding 500-question investor surveys into LLMs to generate instant compliance policies, creating a "synthetic compliance loop" that ignores actual frontline fraud. Read more

How I Invest: American Securities maintains an 80% CEO retention rate by deploying specialized functional experts instead of adversarial "shadow CEOs" who threaten executive autonomy. Read more

M&A Science: Acquirers routinely waste retention packages on founders planning a departure because deal teams fail to have an "honest conversation" about whether the sale is actually an exit strategy. Read more

Private Equity Funcast: Stock options force executives to write personal checks to start the capital gains clock, transferring downside risk directly onto the operator if the "business fails to clear its hurdle." Read more

Private Equity Spotlight: Abbott Capital views aggressive sandbagging as an LP red flag because institutional allocators cannot underwrite performance claims that "contradict audited financial marks." Read more

The Infrastructure Investor Podcast: Hyperscale developments demand 100-plus megawatts and billion-dollar commitments, requiring operators to target “15-year contracts with investment grade counterparties”▶ 3:44 to hit their 10% yield on cost. Read more

3. Most Quotable

"Most people's portfolios, 90% of the risk can be explained by some type of an equity factor, no matter how diversified it looks like when you look at all the line items."

Peter Hecht on How I Invest · Sep 2026. The 60/40 allocation model only worked during growth shocks, failing entirely when inflation breaks the correlation hedge.

"I think this, part of the reason that kinda DPI is the new IRR is because cash doesn't lie."

Jack Purcell on Private Equity Spotlight · Sep 2026. Sandbagging portfolio marks destroys GP credibility faster than simply admitting to a markdown.

"If you're a private equity firm that's trying to raise, you know, a billion dollars to go do a deal, you don't call twenty-five people, you call two or three people, right?"

Kipp deVeer on Dry Powder · Sep 2026. Direct lending scale creates an oligopoly that pushes severe adverse selection down to smaller credit managers.

Bottom Line: While junior dealmakers keep hunting for ZIRP-era multiples, senior partners are liquidating at 2.5x to secure the hard DPI that LPs demand for the next fundraise.