PE Funds Adapt to Changing Investment Landscape

Private equity groups traditionally hold their investment companies for five years. However, several factors have increased the average holding period from 4.5 years to 5.8 years from 2006-2016. This trend is expected to continue in the medium term.

Why this is happening:

  • the global financial crisis froze the exit marketplace and delayed timelines
  • investors want to keep assets at work for longer periods of time
  • increased valuation multiples at entry extend the time required for value creation

Many private equity funds are adding provisions for the ability to extend the duration of a fund. Some of these extensions are from two to four years. Others go so far as to permit an unlimited number of one-year extension periods.

Why it Matters:

Increased options for investors create challenges for fund managers.  The transition toward longer-term and evergreen private equity funds increases options available to limited partners. Some general partners may hold their companies for longer periods to give their companies time to grow into their initial entry prices.

However, the longer holding period can create new challenges for the fund managers. The benefit of predictable long-term income comes with the challenges of dilution and rebalancing for new investors. Investors will also demand increased protections on suspension, termination, and exit to accompany longer holding periods.

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Brent Levin

Investment Banking
Orlando Office

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