View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-May-2015.pdf Lead Article Buyout Holding Periods Download Data Buyout Holding Periods The average time taken to exit private equity-backed buyout investments has increased year-on-year since 2008. Anna Strumillo and Ciantelle Lawrence conduct an in-depth analysis of buyout holding periods. Private equity investments are traditionally long-term investments Fig. 1: Proportion of Number of Active and Realized Private with typical holding periods ranging between three and fi ve years. Equity-Backed Buyout Deals* Globally by Investment Year, Within this defi ned time period, the fund manager focuses on 2006 - 2015 YTD (As at 23 April 2015) increasing the value of the portfolio company in order to sell it at a 100% 1% 0% profi t and distribute the proceeds to investors. This in turn determines 7% 3% 15% how quickly and how much the investors can recycle back into the 90% 23% 33% 30% asset class through new fund commitments. Therefore, the holding 80% 39% period of portfolio companies can have a signifi cant effect on private 52% 70% equity fi rms’ ability to raise future funds as well as on the whole Realized private equity cycle in general. 60% 50% 99% 100% 93% 97% Active 85% Data from Preqin’s Buyout Deals Analyst shows that the average 40% 77% holding period has increased substantially in recent years. The shift is 67% 70% Proportion of Total 30% 61% unsurprising given the tough economic conditions faced in the post- 48% crisis era, leading to buyout fund managers fi nding it increasingly 20% diffi cult to make a profi table exit from their investments. 10% 0% However, despite this overarching longer term trend, the exit 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 environment appears to be fervent with the number and total value of YTD Investment Year private equity-backed exits in 2014 reaching their highest levels on record. In fact, Preqin’s latest 2015 YTD exit data shows a reduction Source: Preqin Buyout Deals Analyst in the average holding period which may indicate a signifi cant *Figures exclude add-on investments. milepost has been reached. Average Holding Period Deals Yet to Be Exited As illustrated in Fig. 2, the average holding period for portfolio Based on the traditional practice of private equity fi rms holding their companies for private equity buyout fund managers has increased investments for three to fi ve years, it was expected that the majority signifi cantly over recent years, from 4.1 years in 2008 to 5.9 years of portfolio companies purchased during the buyout boom of 2006- in 2014. This increase further alludes to the diffi culties found in 2007 would have been exited by now. However, as Fig. 1 shows, exiting companies acquired at high valuations during the buyout 48% of companies acquired in 2006 are yet to be fully realized, while boom. While not a full year fi gure, Preqin’s latest data shows that the the corresponding proportion for those investments made in 2007 average holding period for portfolio companies exited in 2015 YTD currently stands at 61%. This is in comparison to 57% and 67%, has dropped to 5.5 years. This goes to underline the favourable exit respectively, a year ago. conditions which on the one hand have created a sellers’ market, Fig. 2: Global Average Holding Period by Year of Exit, 2006 - Fig. 3: Breakdown of Holding Periods by Year of Exit, 2006 - 2015 YTD (As at 23 April 2015) 2015 YTD (As at 23 April 2015) 7 100% 3% 3% 3% 5% 6% 6% 6% 8% 7% 4% 90% 12% 14% 12% 8% 5.9 12% 13% 14% 6 5.8 25% 5.5 5.5 80% 22% 5.3 29% 5.1 24% 5 70% 32% 27% 33% 10 Years or More 4.5 4.4 4.3 60% 43% 4.1 49% 7 - 9 Years 4 50% 53% 41% 39% 32% 4 - 6 Years 40% 3 Under 4 Years 30% 61% Proportion of Total 53% 56% 54% 2 20% 38% 32% 32% 32% 26% 30% 10% 1 Average Holding Period (Years) Average 0% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015 YTD Year of Exit Year of Exit Source: Preqin Buyout Deals Analyst Source: Preqin Buyout Deals Analyst 7 Private Equity Spotlight / May 2015 © 2015 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-May-2015.pdf Lead Article Buyout Holding Periods Download Data Fig. 4: Regional Average Holding Period by Year of Exit, 2006 Fig. 5: Global Average Holding Period by Industry for All Exits, - 2015 YTD (As at 23 April 2015) 2006 - 2015 YTD (As at 23 April 2015) 7 6 6.2 5.3 5.3 5.2 5.2 5.1 6.1 6.0 5.0 5.0 4.9 6 5.8 5.8 5.7 5 4.7 4.6 5.5 5.5 5.5 5.5 5.5 5.6 4.4 4.3 5.3 5.3 5.1 5.1 5.2 5.0 4.8 4.9 4 5 4.5 4.7 4.6 4.7 4.7 4.4 4.44.4 4.3 4.4 4.1 4.2 3.9 3.93.9 3 4 3.6 3.8 3.4 3.5 3.1 2 3 1 2 Average Holding Period (Years) Average 0 1 Average Holding Period (Years) Average 0 Materials 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Industrials Real Estate Healthcare Information YTD Technology Year of Exit Infrastructure Energy & Utilities North America Europe Asia Rest of World Business Services Clean Technology Consumer & Retail Telecoms & Media Food & Agriculture Source: Preqin Buyout Deals Analyst Source: Preqin Buyout Deals Analyst and on the other, an opportunity for buyout managers to deploy Geographic Variations some of the estimated $469bn in dry powder at their disposal via secondary buyouts. There are notable geographical variations in average holding periods for private equity-backed deals. As shown in Fig. 4, since The additional breakdown provided in Fig. 3 reveals that while just 2006, the average holding period for portfolio companies based in over half (53%) of portfolio companies fully exited in 2006 had been North America increased from 4.4 years in 2006 to a high of 6.0 held by private equity fi rms for under four years, this proportion years in 2014. Europe, however, has the longest average holding dropped to 26% of all companies exited in 2012 and currently stands period of all regions at 6.2 years for deals exited in 2014, compared at 32%. The opposite trend can be observed for companies held by to a European low of 4.1 years in 2008. The holding period for Asia- private equity fi rms for seven to nine years: in 2006, the portfolio based portfolio companies has increased from 3.4 years in 2007 to companies fully exited after being held for this period accounted for 5.6 years for companies exited so far in 2015, while holding periods 12% of all companies exited that year; this proportion increased to in the Rest of World region increased from a low of 3.1 years in 2008 29% in 2014 and stands at a quarter of all companies exited in 2015 to a high of 5.5 years in 2012 and 2013. YTD. Holding Periods by Industry Nonetheless, there are some notable investments which are exceptions in the trend of longer holding periods, such as Warburg Fig. 5 displays the average holding periods for the period 2006-2015 Pincus’ investment in JHP Group Holdings, Inc. Warburg Pincus held YTD, broken down by the portfolio company’s industry. It is apparent the company for just over a year and in early 2014 sold it to TPG- that portfolio companies in the industrials, and consumer & retail backed Par Pharmaceutical Companies, Inc., reportedly reaping sectors have on average had the longest holding period of 5.3 years, three-times their investment. Similarly, earlier this year, Clearlake while the companies operating within the energy & utilities industry Capital Group made a quick three-times return on their investment have on average been held for one year less, with an average in PrimeSport, Inc. after holding a stake in the company for less than holding period of 4.3 years. 12 months. Fig. 6: Average Holding Period for Private Equity-Backed Portfolio Companies by Deal Value, 2006 - 2015 YTD (As at Fig. 7: Private Equity-Backed Exits by Type, 2006 - 2015 YTD 23 April 2015) (As at 29 April 2015) 8 1,800 500 1,600 450 ($bn) Aggregate Exit Value 7 1,400 400 350 1,200 6 300 1,000 250 5 800 200 No. of Exits 600 4 150 400 100 3 200 50 0 0 Average Holding Period (Years) Average 2 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD YTD Year of Exit Year of Exit IPO Restructuring Small Cap (Less than $250mn) Mid Cap ($250-999mn) Sale to GP Trade Sale Large Cap ($1bn or More) Aggregate Exit Value ($bn) Source: Preqin Buyout Deals Analyst Source: Preqin Buyout Deals Analyst 8 Private Equity Spotlight / May 2015 © 2015 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-May-2015.pdf Lead Article Buyout Holding Periods Download Data Size of Deals Exits On average, deals across all size classes have seen holding periods Although fund managers are largely holding onto portfolio companies lengthen over recent years, but large cap deals ($1bn or more) for longer, the number and aggregate value of private equity-backed have seen the largest change since 2006 (Fig.