What is the root cause of longer holding periods for portfolio companies in private equity funds? According to Axial Forum, the life span of funds has increased and LPs are seeing more value in longer life funds. Quadrillion Partners’ Managing Partner, George Stelling, shares his thoughts in Axial Forum’s recent article: PE 2020: Private Equity Goes Long, on the growing trend of longer hold periods for private equity portfolio companies as well as the importance of longer term initiatives and operationally oriented GPs in private equity investing. Highlights include:
- Patient Capital: As private equity investment styles evolve, even the powerhouse firms such as Carlyle and Blackstone “have introduced funds with longer lives, lower fees, and a mandate to consider such investments as minority stakes, family businesses and lower middle market and middle market companies.”
- Holding Periods Reach Their Peak: Pre-2008, most private equity firms held on to their portfolio companies an average of 3-4 years. Post financial crisis, holding periods lengthened as fund managers waited out the uncertain markets and worked to restructure operations. However, the tides may be changing notes George Stelling, “In the last 18 months, many exits have occurred as demand has revived, interest rates remain low, and valuations have gone up.”
- Buy and Build will Shape the Future: The trend toward “buy and build” strategies is growing, and with that, so is the trend of taking a more strategic partnership role in order “to add value through operational means.” Stelling discusses how, “Companies that require more operational improvements and implementation of various growth strategies will be held longer, since it takes time to implement and ingrain changes in businesses. Changes in middle market companies may take longer still, since they typically do not have the same level of resources that larger firms do.”
This trend coupled with a crowded middle market private equity landscape and ever higher valuations reinforces the importance of sound, initiative based value creation plans developed and implemented in partnership with management and operationally oriented GPs.
To read more, go to Axial Forum’s PE 2020: Private Equity Goes Long.