DealLawyers.com Blog

It’s no secret that PE funds have been compelled to hang on to their investments in portfolio companies for longer periods of time in recent years, but an FTI Consulting article from last summer suggests that exits are likely to be even tougher to come by over the next few years:

[T]he exit transaction stalemate likely will worsen over the next couple of years, as the investment vintage years of 2021-2022 represent a high watermark for the number of U.S. buyout deals done and transaction multiples paid — even higher than multiples paid in 2017-2019 per PitchBook —which is attributable to a ZIRP monetary policy that propelled valuations at the time but is now long gone.

As the investment year buyout cohort of 2021-2022 approaches its five-year holding period, sponsors will be forced to reckon with market valuation multiples that in many instances are appreciably lower than those they bought-in at while potential buyers contend with borrowing rates that are materially higher than rates in the pre-QT period. Sponsors will need to assess this deal environment and decide what actions are most sensible relative to their investors’ expectations.

FTI says that this means it’s likely that funds’ average holding periods for their portfolio company investments will continue to trend longer as these 2021-22 transactions mature and “the harsh reality of lower exit multiples becomes more evident to sponsors.”

– John Jenkins