Age of Currently Held U.S. PE Portfolio Companies
Previously, I wrote about the median age of private equity portfolio companies upon exit. I also showed the spread in holding periods for these exited portfolio companies. In this study, I investigate the age distribution of currently held U.S. portfolio companies.
This chart is effectively the shape of the parade of future PE portfolio company exits.
As previously reported, the median holding duration for private equity portfolio companies is 4.9 years upon exit. However, the median age of current portfolio holdings is 3.3 years. Although we would expect the current portfolio companies to have lower aging compared to exited companies, this gap (between 4.9 and 3.3) is sufficiently large that I think we will see the median age for exited portfolio companies continue to decline a bit more over time, (unless overall industry dynamics change in the near term).
This trend of declining holding periods is intuitive, in that private equity firms produce favorable returns for their portfolio companies more quickly in a bull market with expanding valuation multiples. And, by all accounts, valuations are high right now.
Effects of the Bubble/Recession
Of notable interest is that we can still see the effects of the last bubble (2006 – 2007) and subsequent recession (2009 – 2010). This is evident in the slight dip in the bar chart for years 9 – 10 (recession) and the slight bump up in the chart for years 11 – 12 (bubble).
Recession – Portfolio companies purchased 9 – 10 years ago were purchased around 2009 – 2010. At the time, the recession was daunting, and valuations were low due to the extreme uncertainty in the market and in the overall economy. Portfolio companies purchased during this time were often bought at favorable valuations and were quickly lifted by the economic recovery that followed and by some natural multiple expansion as the uncertainty began to fade. Consequently, the PE firms did not need to hold these portfolio companies as long to yield a sufficient ROI. This is why we see fewer current portfolio companies that are 9 – 10 years old.
Bubble – Conversely, company valuations were at a peak just before the recession – the bubble years of 2006 – 2007 (11 – 12 years ago). Portfolio companies purchased during this time were likely devalued quickly as the recession hit. Overall, these portfolio companies have been held longer as the PE firms required more time to recuperate from buying at the peak and operating through the recession.