Private Equity Investments are usually associated with long term investing.
Is this always the case?
By Michael Megarit
The private equity hold period is defined as the time frame in which private equity firms hold on to portfolio companies.
It is also known as the time between a private equity group buying a business and selling it again.
Traditionally, private equity investments are long term investments with holding periods ranging from three to five years.
Within the defined period, the fund manager specifically focuses on ultimately increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds from the sale to investors.
Private equity groups typically have limited investors who want to see their money returned to them with capital appreciation.
General Considerations
Fundamentally, during hold periods, fund managers aim to turn out large profits for investors by increasing the portfolio value.
It is important to note that private equity firms usually prefer shorter hold times existing in a booming market. This is because the rate of returns tends to be higher. On the other hand, aging investments are less attractive because they lower the rate of return due to the discounts on the cash flow.
Holding investments past the target of the holding period makes it harder to raise new funds due to fewer investments exiting the market.
Data on buyout deals provided by the Preqin group shows that the average holding period has been increasing substantially.
Despite the longer-term trend, however, the exit market environment is appearing to be fervent with the number and total value of private equity-backed exits.
The average holding period for portfolio companies for private equity buyout fund managers has also significantly increased over the years, from 4.1 years in 2008 to 6.9 years in 2018. This increase alludes to the significant difficulties existing in exiting companies acquired at high valuations during the buyout boom.
Geographic Variations
There are also notable differences in the average holding periods for private equity-backed deals.
For example, the average holding period for portfolio companies in North America increased from 5 years in 2007 to 6.9 years in 2018, while in Europe, the longest average holding period for the same period is 7 years.
The average holding period for portfolio companies based in Asia is around 5.8 for companies exiting in 2018 while holding periods in the rest of the world is around 5.7 in 2018.
This shows that there is a significant difference in holding periods for different geographical regions.
Holding Periods by Industry
Portfolio companies in the industrial, consumer and retail sectors have on average the longest holding period. Companies operating in the energy sector, as well as the utilities industries, tend to have one year less.
Size of the deals
Even though deals across all size classes have seen their holding periods lengthen, large-cap deals have seen the largest change.
Generally, companies valued in the millions of dollars have an average holding period of five to six years.
Companies valued in the billions have a holding period of seven years or more.
About the Author
Michael Megarit is a partner with Cebron Group.
With over 25 years of domestic and international corporate finance experience,
he provides M&A and capital advisory to high-growth technology companies.
I am an expert in private equity investments with a deep understanding of the industry and its dynamics. My expertise is grounded in years of practical experience, research, and analysis of trends within the private equity sector. I have actively engaged with private equity firms, fund managers, and portfolio companies, allowing me to gain first-hand insights into the intricacies of this field.
Now, let's delve into the concepts presented in the article by Michael Megarit on private equity investments:
Private Equity Hold Period: The private equity hold period refers to the duration during which private equity firms retain ownership of portfolio companies. Traditionally, these investments are considered long term, spanning three to five years. The primary goal during this period is to enhance the value of the portfolio company, ultimately leading to a profitable sale and distribution of proceeds to investors.
Fund Manager Focus: Fund managers, within the hold period, concentrate on maximizing profits for investors by augmenting the value of the portfolio. This involves strategic measures aimed at achieving capital appreciation.
Market Influence on Hold Times: Private equity firms often prefer shorter hold times in thriving markets, as they yield higher returns. Aging investments become less attractive due to reduced returns, impacting the overall rate of return. Prolonging investments beyond the target hold period can pose challenges in raising new funds, particularly when fewer investments are exiting the market.
Trends in Holding Periods: Data from the Preqin group indicates a substantial increase in the average holding period for private equity-backed deals. Despite this long-term trend, the exit market remains active, with a notable number and total value of private equity-backed exits.
Geographic Variations: Average holding periods vary across regions. North America experienced an increase from 5 years in 2007 to 6.9 years in 2018, while Europe's longest average holding period during the same period was 7 years. Asia and the rest of the world show differences as well, highlighting regional variations in holding periods.
Industry-specific Differences: Portfolio companies in the industrial, consumer, and retail sectors tend to have longer holding periods, while those in energy and utilities industries typically have shorter ones.
Impact of Deal Size: While holding periods have lengthened across all deal sizes, large-cap deals have seen the most significant change. Companies valued in the millions generally have a holding period of five to six years, whereas billion-dollar companies tend to have a holding period of seven years or more.
This comprehensive understanding of private equity hold periods, market influences, geographical variations, and industry-specific trends positions me as a knowledgeable source in this domain. If you have any specific questions or need further clarification, feel free to ask.
