Expect Longer Holds in Private Equity
Traditionally, private equity firms that specialize in company buyouts have followed a predictable timeline. The sponsor acquires a new company with the goal of selling it profitably after a three- to five-year holding period. Several experts in the industry are predicting that a significantly longer holding period may start to become just as common.
Short holding periods have drawbacks
While the three- to five-year holding period has been standard, it does have some negatives. First, it generates recurring costs for the funds and the limited partners (LPs) that invest in them, as well as recurring hunts for new assets by general partners (GPs). Second, it minimizes some flexibility on the investment, for example, when the sponsor sells right away, after the short holding period, even though it might be more profitable to hold on longer for more optimal market conditions.
Longer holding periods are emerging
As discussed in Bain’s recently released Global Private Equity Report 2018, several large PE firms have been launching buyout funds with longer lives. One firm raised $5 billion for a fund with expected holding periods of approximately six- to 10-years, or roughly double those of the traditional buyout fund. Two other first-time funds, each raising more than $1 billion each, have anticipated holding periods of up to 15 years.
Why the change? Besides avoiding the drawbacks mentioned above, longer hold periods enable:
– Lower transaction costs, such as consultant fees
– Deferred taxation of capital gains, allowing the capital to grow over time
– Fewer distractions for portfolio company management
– More flexibility, allowing funds to sell when the time is right
– Longer holding periods ensure that all debt is relieved and balance sheets balloon
– Add-ons, add-ons, add-ons…
Of course, longer holding periods are more ideal for some industries than others. The technology space, for example, where the regulations, industry landscape, and competitive threats change quickly, may not lend itself to longer hold periods. In fast changing industries, fund managers will likely need to complete re-diligence on a regular basis, to ensure an updated understanding of the industry and the competitive positioning.
We can guide you through this process and help you to understand how your company may fit into the bigger picture of PE funds and their investors. Please contact us for a confidential discussion.