Stay informed with the latest updates on European private equity trends

European private equity firms are facing challenges as they are being forced to hold assets for longer periods of time, impacting their ability to return cash to investors. Last year, companies sold by buyout groups in Europe were owned for an average of nearly six years, the longest period since at least 2010. This is a significant increase from the typical three to five-year ownership period that private equity firms aim for.

The traditional buyout model is under pressure due to factors such as rising interest rates, making borrowing more expensive for new deals. This has led to a slowdown in dealmaking and a lack of exits for private equity firms. The IPO market has also been quiet, and businesses have been dealing with challenges such as the pandemic, high inflation, and geopolitical instability.

Industry experts are concerned about how private equity firms will sell companies that are not growing rapidly or have lower profit margins, as they need to return capital to their investors. The average revenue growth rate for companies declines as the length of ownership by private equity firms increases, indicating a challenge in generating returns on long-held assets.

Some companies owned by private equity for more than five years have failed to sell due to valuation disagreements between buyers and sellers. To address this issue, some firms are creating “continuation” funds to keep their best assets for longer periods. This tactic allows investors to cash out while the assets are transferred to a new fund.

Overall, the private equity industry is facing a complex environment with challenges in exiting investments, increasing hold periods, and the need to generate returns for investors. As firms navigate these obstacles, they are becoming more selective in their investments and exploring new strategies to manage their portfolios effectively.