European private equity holding periods extend as exit activity slumps

European private equity funds are extending the holding periods of portfolio companies amid slow exit activity, raising concerns about future fundraising and potential capital deployment.

"Given the ongoing challenging exit environment, we expect investment holding periods to be extended compared to recent history," said Preqin Senior Vice President of Research Insights Cameron Joyce in an email.

The European buyout fund holding period has lengthened to an annual average of more than five years since 2010 from about three-to-four years in the preceding decade. For 2023, the average holding period grew to 5.89 years as of Sept. 1, according to Preqin data. The longest average annual holding period in the region since 2000 was 6.29 years in 2014.

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Sector breakdown

Preqin data shows financial and insurance services, as well as IT, had the lowest average hold periods, at 4.6 years, across all sectors in 2022. Since 2010, both of these sectors have had the shortest annual average holding periods across all sectors.

Energy and utility companies were held by European private equity funds for 8.5 years in 2022, the longest duration across all sectors in more than 10 years.

European fund exits

One factor influencing holding periods is IPO activity. Private equity firms may be waiting for markets to revive and valuations to rise. But European exit activity in the year to Sept. 1 was valued at $68.70 billion, on track to match the weak year of 2022, when the value was $72.80 billion, according to Preqin.

General partners (GPs) are hesitant to divest their investments due to uncertainty surrounding their preferred exit multiples, Joyce said. "For now, the bid and offer prices among market participants remains comparatively wide."

In the third quarter to Sept. 1, the total value of European private equity exits was $17.80 billion across 147 transactions, compared to $38.30 billion across 171 deals in the full second quarter.

Slow exits impact fundraising

GPs will likely adopt a pragmatic outlook should challenging market conditions persist, Joyce said, because the situation impacts cashflow to limited partners. Even with flexibility in capital return dates, GPs have to be mindful of fund lives.

"A slower pace of distributions to LPs has contributed to the limited capacity that some institutional investors have to deploy capital into new funds," Joyce said.