European private equity groups forced to hold onto assets for longer

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European private equity firms are being forced to hold assets for increasingly longer periods of time, highlighting the problems the industry is having in returning cash to investors.

Last year, companies sold by buyout groups in Europe remained owned for an average of nearly six years, according to data provider Gain.pro, the longest period since at least 2010. Typically, private equity seeks to own assets for between three and five years. . Holding periods hit their lowest level in 2012 and 2020, when the average investment was in property for less than five years, the data shows.

The traditional purchasing model has come under increasing pressure over the past two years, with companies struggling to exit investments made when the industry was flourishing in a low interest rate environment.

Successive rate hikes have increased the cost of borrowing to finance new deals, meaning buyout groups have been less willing to buy assets from each other.

At the same time, the IPO market (another traditional exit route for private equity) has also been quiet, while companies have had to deal with the pandemic, high inflation and increased geopolitical instability. This has left private equity firms globally with a record 28,000 unsold companies.

“First came Covid and then everything that came after. It wasn’t a double whammy, it was a triple whammy,” said Philip De Vusser, COO of Gain.pro, referring to high interest rates, inflation and supply chain shocks from the Russian invasion of Ukraine.

The slowdown in trading, coupled with more expensive financing, means companies are becoming more selective about which assets they buy, industry executives and advisers said.

This raises questions about how they will sell companies that are not growing as fast and with lower profit margins, something they are under pressure to do to return capital to their investors.

“You have to show exits, but if it’s a multiple of 0.5 money, will you really do it?” DeVusser said. “If you’re fundraising, you want to have a good exit.”

Companies’ average earnings growth rate declined relative to the time they were in the hands of their private equity owners, research shows.

Assets held for more than seven years grew on average 6.5 percent annually, less than half the rate of those held for less than three years, according to the report.

Examples of companies owned by private equity for more than five years that failed to sell over the past year include pet food company Partner in Pet Food, commercial laundry company JLA and resort group Center Parcs, according to people familiar. with the details. This was partly due to valuation disagreements between buyers and sellers.

“Interest rates are a big driver of multiples,” said Sid Jain, head of research at Gain.pro. “Investors are less willing to sell at lower multiples, so even for higher quality assets investors are not willing to pay.”

In addition to difficulties exiting some companies, average holding lengths are also being driven by groups seeking to hold on to their best assets for longer.

They can do this through tactics such as creating a “continuation” fund. This is a new fund to which assets are transferred and investors are given the opportunity to withdraw money.

Recent examples include European investment group Permira moving assets, including wealth manager Evelyn Partners and data center group Teraco, into a new fund. Permira invested in the assets in 2014 and 2015 respectively, according to its website.

Riccardo Villa, head of strategic capital advisory at placement agent Rede Partners, said these “cross-fund operations. . . (had) really increased in the last few years.”

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