Private Equity Holding Periods – Histogram
I previously discussed the trend in median holding periods for private equity-owned portfolio companies. However, there is a significant standard deviation in the data.
The histogram below shows the distribution of holding periods for portfolio company exits in 2016. The data revealed two interesting insights… one driven by macro-economics, the other cultural.
The data left of the median (0 – 5 years) looks much like a normal distribution while the data to the right of the median (5+ years) is skewed with a longer tail and an unusual bump at 8 – 10 years.
Cultural Effects: The Long Tail
Of the 29 portfolio companies held longer than 12 years, 7 were purchased prior to the year 2000. The oldest was held 22 years! I looked for a common theme among these long-held positions and found one. It wasn’t by industry, but by geography. The longest held positions are almost all in Europe – European portfolio companies held by European private equity firms.
Europeans Hold Investments Longer
Out of curiosity, I computed the median holding period for portfolio companies in the U.S. versus Europe.
- U.S. = 4.9 years
- Europe = 5.4 years
Not only are the longest held positions in Europe, the median holding periods are also longer than in the U.S.
Macro-Economics: The Bump in Year 8 – 10
With 2016 as the exit year, 8 to 10 years prior would have been 2006 – 2008. These were the portfolio companies acquired at the market’s valuation peak, just before the recession. Consequently, these holdings needed more time to recover to acceptable valuation ranges on exit relative to the purchase price.
Conversely, the data also shows a shorter holding period in years 6 – 7. These were the portfolio companies acquired in 2009 – 2010, during the recession and likely at advantageous valuations (for the buyer). These investments required less time to produce a solid ROI. Hence, the shorter hold period.