Why are PE Firms Not Keeping Portfolio Companies as Long?

The world of private equity is in constant flux. Anybody who has spent anytime with the high-minds in private equity would confirm this observation. The new question on the flux is this – Why are private equity (PEs) not keeping portfolio companies as long as they used to?

The question stems from a recent report out of private equity data provider Pitchbook, which showed that PE firms are just not as long of a holder of portfolio companies as they used to be.

The Data

The following Figure 1 is the data behind the question. The chart shows the PE holding times for the bottom quartile, the bottom decile, the median, the top quartile, and the top decile of PE companies. The time period covers 2009 to 2019.

Interestingly, holding times grew through the first half of the 2010s. For the top decile of private equity companies, the holding time went from a little less than 10 years to a peak of a little over ten years in 2016.

For the top quartile of companies, holding times consistently rose, from almost 6 years in 2009 to a peak of about 8 years in 2016.

For the median of PE companies, the holding time grew from a little less than 4 years to a peak of about 6 years in 2014.

The bottom quartile of companies saw their holding times grow from a little more than 2 years in 2009 to a peak in 2012 of just shy of 4 years. Since that time, the holding period for the bottom quartile of companies slowed declined, to its most recent bottom of 2.4 years in 2019.

The bottom decile of companies has the lowest holding period, going from just under 2 years in 2009 to a relatively flat 2.4 through the 2010s.

The Recent Downdrift

Depending upon which quintile a fund manager is in, the downward drift in holding period began in the mid-2010s. Interestingly, the downward drift is present across all deciles of fund manger performance. Perhaps more interesting is that the top quartile has seen the largest drop in holding period from its peak and the top decile of fund managers has a holding period that is still higher, at 10.6 years, than what it was in 2009, which was just shy of 10 years.

Why?

One potential explanation for the declining holding times is the improved liquidity of the inter-industry trading of portfolio companies. Prior to the onset of the 20^th Century, it was virtually impossible for a PE fund manager to unload the holdings in his portfolio. With PE fund managers communicating more frequently, and the liquidity of the market improving, PE fund managers may be selling companies more frequently to other PE fund managers.

Another potential explanation is that PE fund mangers have become more jittery on the state of the economy. Given their concern about the state of the economy, fund managers may jump at opportunities to unload companies that they think may deteriorate in value should a recession occur.

A third possibility is that the types of companies making up an average PE portfolio are changing. In prior years, PE fund managers held less technology companies. That has changed. PE fund managers may simply be responding to the nature of the companies they are holding nowadays.

Conclusion

Overall, the holding period of companies for PEs is declining. Why PE fund managers are holding companies for fewer years is up for debate, with possible explanations including the nature of the PEs portfolios, the state of the economy, and the improved liquidity of inter-industry trading.