"Chart of the Month" From HQ Trust: Private equity - The mounting pressure to sell

Over the past year, a clear trend has emerged: private equity managers are holding onto their investments for longer. The average holding period of US-based private equity owned companies exceeded 3 years for the first time in a decade.

Benedikt Pfeuffer, Co-Head of Private Equity at HQ Trust, provides insight into the underlying causes of this development and offers his view of what the future holds. In his analysis Benedikt Pfeuffer pays particular attention to the median holding period, as well as the proportion of shareholdings that have been in private equity ownership for more than five years and hence exceed the typical private equity investment duration.

Commenting on the current situation, Benedikt Pfeuffer says:

• “The median holding period of portfolio companies held by US-buyout funds has increased by 6 months, reaching a total holding duration of 3.3 years.”
• “The proportion of companies which have been held by private equity managers for more than five years has increased to 31% – reaching a 10-year high.”
• “Pricing disparity between buyers and sellers, loan underwriting hesitance from banks as well as high cost of capital, contributed to 2023 transaction volumes lagging behind record-breaking deal-making in 2021 and 2022.”
• “Although private equity managers benefit from comparatively lower acquisition prices in the current environment, they are not prepared to sell at these prices.”

Will the situation change over the course of the coming year?

• “The expected interest rate cuts and the associated valuation increases suggest a rebound of M&A transaction volume in 2024.”
• “In addition, we are seeing early signs from US-banks that their willingness to provide financing is growing again.”
• “Meanwhile, managers are coming under increasing pressure to sell their portfolio companies: investors continue to express their clear preference for liquidity and realisation of returns.”

Will Private Equity remain an attractive investment opportunity?

• “Subject to the selection of good managers, we expect private equity to continue to generate attractive returns in the long term.”
• “At HQ Trust, we rely on experienced managers who focus on implementing operational value enhancement strategies that are less dependent on the state of capital markets (financing and valuation levels) for generating returns.”
• “Current examples of this are buy-and-build strategies (buying a platform company and acquiring further smaller companies which complement the platform), corporate carve-outs (spinning out divisions from major corporations) or organic growth by internationalising companies.”