private equity exit strategies
The average holding period for companies in private equity portfolios is five years.
There are several primary methods of exiting an investment in a portfolio company:
- Trade sale: Sell a portfolio company to a competitor or another strategic buyer.
- IPO: Sell all or some shares of a portfolio company to the public.
- Recapitalization: The company issues debt to fund a dividend distribution to equity holders (the fund). This is not an exit, in that the fund still controls the company, but is often a step toward an exit
- Secondary sale: Sell a portfolio company to another private equity firm or a group of investors.
- Write-off/liquidation: Reassess and adjust to take losses from an unsuccessful outcome.
Private equity potential benefits and risks
There is evidence that over the last 20 years, returns on private equity funds have been higher on average than overall stock returns. Less-than-perfect correlation of private equity returns with traditional investment returns suggests that there may be portfolio diversification benefits from including private equity in portfolios.
The standard deviation of private equity returns has been higher than the standard deviation of equity index returns, suggesting greater risk. As with hedge fund returns data, private equity returns data may suffer from survivorship bias and backfill bias (both lead to overstated returns). Because portfolio companies are revalued infrequently, reported standard deviations of returns and correlations of returns with equity returns may both be biased downward.