January 30, 2020

Private Equity: Funds Headed for the Exits More Quickly in 2019

According to this PitchBook article, average PE fund hold times for portfolio companies fell to 4.9 years during 2019, the first time that number’s fallen below 5 years since 2011.  By way of comparison, hold times averaged 6.2 years as recently as 2014.  What’s behind the decline? The article says it’s a combination of a strong seller’s market & an increasingly systematic approach to exit decisions:

Portfolio companies aren’t “positions” that can be pared down or modified if market conditions change. Whole companies are big and clunky compared with tradable shares, and buy-side love is in the eye of the beholder. But exits have been a bit easier to achieve in recent years amidst a broader M&A boom. That’s made it easier to offload companies a bit sooner than in the past. There’s also a motivation to spend more time on the fundraising trail, which, perhaps coincidentally, has been on fire since 2016.

Less coincidental is a rise in exit committees across the industry. Formalized investment committees date back to PE’s earliest days, and each portfolio company tends to have a cheerleader who spearheads the firm’s investment.

For a long time, investment decisions have passed through a more rigorous approval process while exit decisions are made by one or two senior directors who were responsible for that investment. Emotions get involved at the exit stage, and an increasing number of firms are formalizing those decisions and taking away individual decision-making. That trend is probably contributing to shorter holding times—likely making many LPs happy twice over.

John Jenkins