North American private equity buyout funds have held onto their portfolio companies longer in 2023 as the uncertain direction of the economy and a mismatch between buyers and sellers in asset pricing hinders exit activity.
The average holding period for buyouts among US and Canadian private equity funds spiked to 7.1 years in 2023 as of Nov. 15, the longest hold since at least 2000, according to Preqin Pro.
In comparison, during full year 2022 the average holding period was 5.7 years.
Historical trends show that average holding periods have been on the increase. Between 2014 and 2023, the holding period averaged 5.8 years, compared with around 4.9 years in the preceding decade.
The exit factor
The number of global private equity exits have shown quarterly increases this year but appear on track to show a two-year annual decline.
In the US, a key factor in exit hesitation is the Federal Reserve's interest rate decisions and whether a soft landing or a recession will result, said Steve Zaorski, asset management partner at law firm Ropes & Gray, in an emailed response.
– Download a spreadsheet with data featured in this story.
– Read about the prolonged holding periods of European private equity funds.
– Explore more private equity coverage.
"This uncertain economic environment resulted in a mismatch in expectations between buyers and sellers and made assets harder to price, which resulted in private equity firms holding onto assets longer rather than selling at a less than optimal price in their view."
Fewer exits means a decrease in distributions to limited partners and subsequently a challenging fundraising environment because investors have less capital to deploy into new private equity products, Zaorski added.
Managers with near-term fundraising plans are also pressured to work on a backlog of exits.
North American exit activity slumps
In North America, exit value year-to-date through Nov. 15 totaled $174.59 billion, down from $303.95 billion recorded in the entire 2022, Preqin Pro data showed. The number of exits stood at 684.
Of the total, 390 exits were trade sales, while 226 transactions were secondary buyouts. Only two IPOs were recorded in the year.
Quarter-to-date through Nov. 15, exits numbered 96 and total exit value stood at $28.35 billion compared to $71.58 billion in the full fourth quarter of 2022.
Outlook
Zaorski expects the length of private equity holding periods decrease by the end of 2024, but not to the shorter time periods seen in 2020.
"I'm cautiously optimistic that the Fed may be done raising interest rates. That stability should provide the private equity market with room to figure out how they can price their assets and start selling them again," Zaorski said.
As a result of extended hold periods, firms need to focus on the working capital and initiatives within their portfolio companies, Pete Witte, global private equity lead analyst at EY, said in an October report.