Some of the most influential voices in the private equity (PE) industry are actively discussing changing the existing standard around holding periods – the time a firm holds a stake in a business before selling on.
The existing typical holding period is five years. This is borne out of the way most PE funds are structured, with raised funds having five years to be invested and there then being another five years to see returns from any deals.
Five years is a typical holding or investment period across the industry, whether there has been a buyout or merger or simply an investment into a company. The concern within the PE industry is that such a holding period and life cycle for investments is potentially leaving money on the table.
Private Equity News cites Jean Pierre Paquin of Brown Brothers Harriman & Co, who relayed an example of his own company, who sold an unnamed company in the 1990s only to see it sold twice, at much higher prices on both occasions, in the following years.
While deeper analysis might show there was a specific course of action that enabled the business to deliver better value and so be sold at a higher price, it is clear that opportunities were missed. That is certainly Paquin’s sentiment regarding this particular deal.
While it seems unlikely that there will be a huge shift in the average or typical holding period, expect many of the world’s leading firms to begin negotiating far more flexibility with investors when they’re putting funds together.
The most exciting aspect of this is that we will likely see a far more pragmatic and fluid approach to deals, although at the same time PE firms will inevitably find themselves with opportunities to profit in year five only to see the value diminish afterwards when they’re committed to holding.
However, the opportunity to capitalise on longer holding periods is likely to outweigh the risks of missing out from a wider portfolio perspective, and we should see firms looking to increasingly benefit from doing so.