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Back to blog September 24, 2019 4 Comments Author: Andy Jones

Private Equity Portfolio Company Holding Periods – Updated

I periodically update the private equity portfolio company holding periods data study to track this trend over time.

The longest median holding period for private equity owned portfolio companies was 5.6 years, back in 2014. This is intuitive because 5 or 6 years prior to 2014 represented those portfolio companies acquired at the peak of the market, just before the last recession. Consequently, the holding periods were extended, allowing more time to recoup from ill-timed acquisitions.

Since 2014, there has been a slight-but-steady downward trend in portfolio company holding durations – until now. The last data point on the right (2019 YTD, through August), represents the first trend reversal for this metric since 2014. Based on the last 5 years, I was expecting to report a median holding period of 4.6 years, but instead, the data shows:

2019 YTD Median Holding Period = 4.8 years

Private Equity Holding Periods

Max = 5.6 years, (2014)

Min = 3.0 years, (early 2000’s) and 3.5 years (2008)

Leading Indicator

Quite a few people have asked me if this trend line might be used as a leading indicator. That is, could this most recent trend reversal point to some insight about the direction of the overall economy?

If investment firms, collectively, are not getting the desired exit valuations relative to expectations, do they elect to hold portfolio investments a little longer? Flipping this logic, if PE firms begin to hold their investments longer, does this imply a softening in the market (or at least the M&A market)?

The previous two trend reversals for holding periods were in 2003 and 2009. One might argue that inflection points in 2003 and 2009 could be a slightly lagging indicator. In other words, is the economy driving the median holding period or is a change in holding period indicative of a directional change in the market?

I’m curious how others view this. Leave a comment below to share your thoughts.

4 Comments:

Philip Marchal 2 months ago

Given the tightness of the range of outcomes, I would be interested to know what the standard deviation is in the data so that we can determine statistical significance. The shift from 2008 to 2014 clearly appears to be statistically significant, but the other shifts are less clearly so to my eye. Thanks.

Andy Jones 2 months ago

Phillip,
Thank you for your thoughts. You bring up a good point about statistical significance. Because just a few long-held portfolio company positions would greatly affect the average (some are held 20+ years), I track the median in the graph. To give you an idea of the sensitivity of the data to the median, I can say the following:

* To move the median value for the 2019-YTD data point, (the last point on the right of the graph), to the 2018 level of 4.7 years, we would need to add 1.6% more portfolio exits, all on the same side (the lower side) of the median.

* Addressing the statistical significance of the general downward trend since 2014, there would need to be 20% more portfolio exits in 2019 AND every one of these closed deals would need to be greater in holding period than the current median to move the median to 2014 levels.

Summarizing…
– A trend reversal from 2018 to 2019-YTD?… too early to call although I think this is within the accuracy of the data to report (but perhaps just barely). It will be more telling with full 2019 data.

– Regarding the statistical significance of the downward trend from 2014 to now, this is definitely statistically significant and well-within data accuracy to report as a trend.

I hope this helps shed some light on the underlying data.

Thanks again for you response.

Dirk Armbrust 2 months ago

It’s also interesting that although holding periods were declining, they never got back to the historic three years. In talking to PE firms, and independent sponsors, quality acquisition deal flow is hard to come by. So, perhaps PE firms continue to hold and reinvest to avoid having to struggle to find the next acquisition.

Andy Jones 2 months ago

Dirk,
Thanks for chiming in on this. Certainly, a lack of quality deal flow is a consistent motif that we hear in the marketplace as well (for a while now). Maybe there is some merit to your point about holding a known portfolio company longer rather than fighting for new, high-quality acquisition opportunities. Interesting point.