Private equity holding periods limit fundraising and may lower valuations

Using our M&A research database, we updated our tracking of private equity Holding Periods to include data from 2000 through 2024, year-to-date. 

The median holding period for private equity-backed portfolio companies is now 5.7 years, the highest value since Private Equity Info began tracking this metric in 2000.  

Macroeconomic effects on fundraising and valuations 

When we last updated the trends in portfolio holding periods in September 2023, we predicted a slower-than-normal pace of exits that would impact the entire M&A ecosystem. This was based on our historical holding period data across three major economic downturns. 

A slower pace of portfolio company exits is the exact trend we now see in the private equity market. This pace of exits translates into longer holding periods and a slower return of capital to LPs of the private equity firms. This capital now has a slower turnaround time to invest into new funds, making fundraising efforts more difficult.

Our prediction, then, is that we should see a slowing of private equity acquisitions—or a greater appetite for smaller deals and add-on investments—over the next few years. We might then expect slower buyer demand to nudge valuations lower, assuming interest rates and other macroeconomic effects remain constant.

Move quicker on exits

Our holding period data from prior economic downturns suggest it takes approximately 4 to 6 years for PE firms to recover from macroeconomic shocks with an expected increase in holding periods of 1.0 to 1.5 years. 

We are now in the fourth year, and holding periods have increased just shy of one year. We may see holding periods lengthen slightly more before reverting to something closer to pre-Covid holding period lengths of 5 years, assuming no other external factors come into play.

Of course, a shortening of the holding period is driven by a higher number of exits. A collective compression of private equity exits might also apply downward pressure on valuations. If this is the case, private equity firms might do well to be slightly ahead of the curve on exits. 

Exercise the contrarian path

While we said in our September article that the holding period data might be a clue to exercise caution with large platform acquisitions, the opposite may also be true. The lengthening of PE holding periods might be a clue to ramp up acquisitions as a contrarian play, at potentially lower valuations over the next 12 to 18 months.

Geographic homogeneity 

For the first time, we also compared portfolio holding periods from the U.S. and Canada to the rest of the world. 

Our hypothesis was that the U.S. and Canadian portfolio companies would have a shorter duration compared to the rest of the world. This is in fact the case for the period 2011 – 2022. However, the most recent exits show the holding periods from different geographies converging to nearly the same value (5.7 years).