Valuation mismatch prolongs private equity buyout holding periods

Private equity and venture capital buyouts recorded longer holding periods across most industries in June compared with 2020 levels, according to an analysis by S&P Global Market Intelligence using Preqin Pro data.

In 2019, private equity firms acquired businesses at high valuations due to favorable financing conditions, said Christian Westra, partner at Ropes & Gray. At the time, buyers could take on significant debt and pay valuations higher than current market levels.

Since then, rising interest rates have created different valuation expectations for buyers and sellers of target companies.

"[U]pon acquisition, interest rates were very low," said Kate Withers, private equity and technology M&A partner at Ropes & Gray LLP. "Borrowing costs have come up, so that has changed the return modeling across sectors."

Limited-partner pressure

Withers expects a busy fourth quarter for private equity exits as macroeconomic conditions somewhat stabilize, the IPO market opens and limited partners seek more liquidity in the form of distributions.

As liquidity pressure builds, even moderately favorable conditions for M&A activity will push sponsors to transact, said Konstanze Nardi, global private equity readiness leader at EY.

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Longest holding periods

The industrial, consumer discretionary and healthcare sectors have some of the longest average holding periods, at 7.5, 6.6 and 6.4 years, respectively.

The average holding period for telecom and media is 9.2 years, though this figure represents only one deal.

Deal activity in consumer discretionary and industrials is particularly impacted by uncertainty around geopolitical disruptions and trade, resulting in softer demand and higher trading volatility, EY's Nardi said.

"It's hard for people to price in the tariff risk at this point because everyone is waiting for it to work its way through the system and see what the impact is," Ropes & Gray partner Timothy Castelli said. Global private equity exit deal value slumped to a two-year low of $80.81 billion in the first quarter as tariff-related uncertainty rattled markets.

When it comes to healthcare, the industry typically has a longer holding period.

"For example, the healthcare space tends to have a greater proportion of roll-up transactions relative to many other sectors in which the industry invests," Nardi said, adding that uncertainty around public sector spending policies can further exacerbate valuation gaps.

"You've had this shortfall in biotech funding," Castelli said. "A lot of that is driven by [National Institutes of Health] funding cuts and layoffs at the [US Food and Drug Administration]. Just a lot of uncertainty for investors and deploying more capital."