“Time is the longest distance between two places.” – Tennessee Williams
One of the most important variables impacting valuations is how much time sponsors have to effect strategies to improve company performance. According to Preqin, the hold period for private equity GPs worldwide was 4.5 years last year – down from 5.9 in 2014.
The impetus to sell properties is influenced by many things: how buoyant financing markets are, the relative challenge of buying (vs. selling), and how motivated sponsors are to realize an investment based on timing of the next fund raise.
Business cycles also impact timing. It’s no coincidence that as we get closer to the end of this recovery, hold periods are shortening. Buyout firms worry that a recession will overturn their best laid plans to improve performance, thus exit multiples.
Beyond buying at the right price, sponsors focus on creating platforms to build value. That’s especially true when purchase price multiples are where they are (see Chart of the Week).