Prolonged private equity holding periods: European evidence

Abstract

OBJECTIVES OF THE STUDY:

Private equity firms' average portfolio company holding periods have significantly lengthened over the last years, especially after the financial crisis of 2008. Recent studies on private equity exits have mainly focused on exit strategies and exit route decisions, and shed only some light on the exit timing decisions. I focus on the determinants of the private equity holding periods and provide evidence on the potential reasons behind the foregoing change. To my best knowledge, this study is the first one to address the lack of understanding behind the determinants of the prolonged private equity holding periods.

DATA AND METHODOLOGY:

The sample used in this thesis is collected from VentureXpert, Zephyr and Orbis and covers the years from 2000 to 2015. I obtain data on 2,328 European private equity buyout deals of which 1,585 (68%) are identified as deals with a known exit date and 743 (32%) as current holdings. Univariate analysis is used to study the length of the private equity holding periods. To analyze the potential determinants of the prolonged private equity holding periods, I utilize a logistic regression model and Cox's proportional hazard model which is able to handle time-varying covariates. Multinomial logistic regressions and OLS are used as a robustness check.

KEY FINDINGS:

I find strong evidence that the private equity holding periods have significantly lengthened from the pre-crisis average of 4.7 years to 5.8 years after the financial crisis, despite the exit route. Additionally, only 42% of the post-crisis exits were made in less than five years, compared to 61% for the pre-crisis period. I find a time-varying combination of the operational development, private equity firm's experience and capital market conditions to be the main determinants of the exit timing decisions. Strong revenue growth increases the likelihood of an exit within five years from the initial investment. Holding periods are likely to be longer when more new buyout funds are raised, and new buyout market entrants have on average around 3 to 6 months longer holding periods. Furthermore, a one standard deviation tightening in the availability of credit decreases the likelihood of an exit within five years by 7.5% to 12.6%, and a 100 bps increase in BAA yield spread post-crisis results to a 7 to 10 months longer holding period on average. When IPO markets turn from "cold" to "hot" the likelihood of an exit within five years from the initial investment increases by around 31.5 percentage points, translating to around 5 to 10 months shorter holding periods on average.