U.S. PE firms slowly reducing inventory of aging portfolio companies

July 22, 2016

After climbing steadily for several years, the median hold period of U.S. PE-backed companies roughly leveled off between 2013 and 2014. From there, the hold period for companies exited via IPO briefly leapt upward in 2015, only to plunge once more this year—probably more a reflection of the recent scarcity of IPOs than anything else—while hold periods for companies exited via secondary buyouts and strategic acquisitions also fell.

Interestingly, the exit route that saw the steepest decline was PE-to-PE, which has several implications, as this number isn’t skewed at all given the considerable number of SBOs that have occurred thus far.

  • First, PE firms are increasingly sourcing in their peers' portfolios, as there's a distinct lack of original, quality companies for sale.
  • Second, buyers are often rationalizing such purchases through their perceived ability to achieve further operational improvements, typically by already possessing resources and specialist operating partners to devote to companies in a particular sector.
  • Finally, GPs selling in these sponsor-to-sponsor transactions are obviously happy to unload companies and achieve liquidity, while those on the buy side are clearly eager to put dry powder to work—whether or not their LPs are excited about the prospect of such recycling among the PE industry.

It’s illustrative of the twin, often-competing pressures GPs are currently facing: the need to put capital to work and the lack of original targets. Both are symptomatic of how the buyout cycle is slowly winding down. 

Note: This column was previously published in The Lead Left.

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