Private Equity Portfolio Company Holding Periods – Updated
We last updated the median private equity portfolio company holding period in May 2020 because I wanted to mark this metric (mostly) before the effects of COVID. In May, the median holding period was 4.8 years, the lowest since 2014.
I revisited the holding period study again this month (November) to measure any changes since May. It ticked up, but only slightly, to 4.9 years.
At first glance, this may seem surprising that COVID-effects are not more profoundly seen in the data. But there’s a good reason for this. There haven’t been that many exits to move the needle on this metric. Private equity portfolio exits are down considerably compared to recent years.
With private equity firms holding portfolio companies through the COVID uncertainty, we will almost certainly see an increase in the median holding period going forward.
2020 YTD Median Holding Period = 4.9 years
Min = 3.0 years (early 2000’s) and 3.5 years (2008)
Max = 5.6 years (2014)
Comments on the Historical Trend
The last recession (2008 – 2010) had a noticeable impact on the holding periods for private equity portfolio companies. Specifically, investments made just prior to the recession, at peak valuations, were held longer.
The maximum holding period peaked at 5.6 years in 2014. This is logical, because 5.6 years before 2014 represents those acquisitions made just before the recession, likely at peak valuations. These ill-timed acquisitions required longer holding periods to realize respectable returns. Consequently, median holding periods elongated, post-recession.
From 2014 – 2018, median holding periods for portfolio company exits showed a smooth downward trend, then leveled off at 4.8 years in early 2020.
The median holding period should begin to increase as private equity firms delay exits due to COVID’s impact on the operating performance of many portfolio companies.
Longer holding periods from private equity firms results in fewer M&A deals on the sell-side from PE shops. This, of course, might be offset with increased investment on the buy-side, as opportunistic PE firms with available funds recapitalize / restructure operating companies that otherwise might not survive the current economic climate.
For those PE firms with dry powder, this could represent an opportunistic season to acquire assets at deep discounts while also preserving the employment and legacy of those brands going forward.
Given the structure of many PE firms, with an end date to their funds, bulges in the pipeline will ultimately resolve in an increased number of exits, eventually.