The Pulse of Private Equity – 5/2/2016

U.S. PE-backed hold times in the middle market remain high

Reflecting the decline in private equity-backed exit activity observed across the whole market in the first quarter of 2016, U.S. PE-backed exits in the middle market were also quite low, with only 170 sales for nearly $13 billion recorded. After the banner run PE sellers have enjoyed for the past couple years, it makes sense that the amount of quality inventory has declined, with firms looking to exit their best prospects at elevated valuations. At this point, judging by median hold times, the inventory PE firms have left on their books from either the buyout boom era or, at least preceding 2010, is only going to become more problematic as time rolls on relentlessly. There are a variety of methods for limited partners or general partners to achieve liquidity beyond those three primary exit routes listed above which have been gaining in popularity, such as the secondary market. Fund managers have doubtless also been negotiating with their backers regarding their aging holdings, looking to extend fund lifetimes and adjust expectations around prospective liquidity timelines. It’s virtually certain at this point that certain fund vintages will see a fair degree of dampening when it comes to returns on an overall basis, even if they do clear most that aged inventory off their books. With continued anecdotal evidence of sellers and buyers having mismatched expectations when it comes to valuations, it’ll take more time for the ongoing shakeout in the PE investment landscape for potential sellers to adjust their viewpoint around what is more reasonable. Some may well take a lower return in order to finally achieve liquidity, although it’s likelier that fund managers will simply extend out fund lifetimes. All in all, PE firms will find a way to grapple with the liquidity problem, but it remains quite pressing.