According to Preqin, a provider of alternative assets industry data, the 2007 financial crisis has caused the holding period for private equity portfolio companies to expand significantly as funds are struggling to sell investments that were purchased at peak prices during the buyout boom.
The average holding period for private equity-backed portfolio companies sold in 2012 has reached 5 years, compared to 3.9 years in 2008. Preqin’s data shows that the average holding period for private equity-backed portfolio companies has increased each year from 2008 to 2012. Mega deals (over $1 billion in valuation) exited so far in 2013 have had an average holding period of 6.2 years, up from just 2.1 years in 2008.
Increased average holding periods have impacted the amount of capital distributed back to investors. For example, after six years, 2001 vintage buyout funds had distributed 95% of paid-in capital back to investors compared to just 33% of paid-in capital after six years for vintage 2007 buyout funds.
“With buyout fund managers now holding portfolio companies for a year longer on average than before the financial crisis, exit conditions clearly remain difficult. Fund managers are still struggling to sell investments for a sufficient profit that were purchased at peak prices during the buyout boom, and consequently are holding portfolio companies for longer,” said Ignatius Fogarty – Head of Private Equity Products. “However, exit activity seems to be on the increase and the fact that distributions have outweighed contributions more recently, means investors are likely to have more capital available to commit to new private equity funds in the near future.”
Other Key Findings from Preqin:
- A significant 63% of portfolio companies purchased in 2006 and 73% purchased in 2007 have yet to be sold, as fund managers have struggled to exit companies purchased during the buyout boom.
- The average holding period for deals exited so far in 2013 has dropped slightly to 4.9 years.
- European portfolio companies have the longest average holding period at 5.2 years for deals exited so far in 2013, compared to 4.8 years for North American portfolio companies.
- The aggregate value of exits dropped to just $5.2 billion in Q1 2009, but has been on an upward trend since, reaching a high of $126 billion in Q2 2011.
- Distributions to investors exceeded contributions for the first time in 2011 since 2005, with fund managers keen to return capital to investors.
- Buyout funds closed in 2012 secured an aggregate $91 billion in capital commitments, compared to $79 billion and $77 billion raised by buyout funds closed in 2011 and 2010 respectively.
- Investors continue to favor buyout funds. 51% of investors looking to make new commitments in 2013 plan to target small to mid-market buyout funds and 23% expect to commit to large or mega buyout vehicles.