The private equity hold period is defined as the time frame in which private equity firms hold on to portfolio companies. It is also known as the time between a private equity group buying a business and selling it again. Traditionally, private equity investments are long term investments with holding periods ranging from three to five years. Within the defined period, the fund manager specifically focuses on ultimately increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds from the sale to investors. Private equity groups typically have limited investors who want to see their money returned to them with capital appreciation.
Fundamentally, during hold periods, fund managers aim to turn out large profits for investors by increasing the portfolio value. It is important to note that private equity firms usually prefer shorter hold times existing in a booming market. This is because the rate of returns tends to be higher. On the other hand, aging investments are less attractive because they lower the rate of return due to the discounts on the cash flow. Holding investments past the target of the holding period makes it harder to raise new funds due to fewer investments exiting the market.
Data on buyout deals provided by the Preqin group shows that the average holding period has been increasing substantially. Despite the longer-term trend, however, the exit market environment is appearing to be fervent with the number and total value of private equity-backed exits. The average holding period for portfolio companies for private equity buyout fund managers has also significantly increased over the years, from 4.1 years in 2008 to 6.9 years in 2018. This increase alludes to the significant difficulties existing in exiting companies acquired at high valuations during the buyout boom.
There are also notable differences in the average holding periods for private equity-backed deals. For example, the average holding period for portfolio companies in North America increased from 5 years in 2007 to 6.9 years in 2018, while in Europe, the longest average holding period for the same period is 7 years. The average holding period for portfolio companies based in Asia is around 5.8 for companies exiting in 2018 while holding periods in the rest of the world is around 5.7 in 2018. This shows that there is a significant difference in holding periods for different geographical regions.
Holding Periods by Industry
Portfolio companies in the industrial, consumer and retail sectors have on average the longest holding period while the companies operating in the energy sector, as well as the utilities industries, tend to have one year less.
Size of the deals
Even though deals across all size classes have seen their holding periods lengthen, large-cap deals have seen the largest change. Generally, companies valued in the millions of dollars have an average holding period of five to six years, while those valued in the billions have a holding period of seven years or more.