When private equity (PE) firms make investments, their partners are typically looking to acquire a company, increase its value, and sell (or exit) this investment all within three to five years.
More recently – due to a variety of macroeconomic conditions ranging from COVID, labor shortages, inflation, or an elevated interest-rate environment – PE firms have been extending their average hold periods, a trend that is reshaping the M&A landscape across the U.S. and particularly in the middle market.
As PE hold periods lengthen, here are three things our advisors expect to see:
1. Pending Wave of Exits
The delay in exits means that PE firms are accumulating aging assets (ie companies in their portfolio) that will eventually need liquidity events (or exits). The last time this happened was during the post-financial crisis period of 2008-2013. What happened next? A surge of M&A activity from 2013-2015 that fueled a middle market boom that lasted a decade.
2. Strong Companies Draw More Buyers & Bids
The longer hold periods have allowed PE-backed companies to increase their value by improving operational efficiencies, deleveraging, and overall positioning themselves as stronger acquisition targets. When these high-performing portfolio companies eventually come to market, we expect competitive bidding from a bevy of buyers.
The same expectation holds true for smaller businesses: well-positioned companies with strong cash flows, niche capabilities, or strategic geographic presence will be prime acquisition targets.
Valuations remain as competitive as ever for A+ companies; however, expect buyers to moderate their valuations when presented with anything less than a perfect acquisition target. Simply put, the valuation gap between the best 5-10% of companies and the rest continues to widen. That said, buyers remain willing to get creative to get deals done with companies outside that top tier. Look for offers with more earnouts, structured exits, deferred payments, profit-sharing arrangements, or roll-over equity stakes instead of all-cash exits.
3. Deal Pipeline Prioritizes Quality over Quantity
This point ties to the one above as PE partners are shifting their focus toward quality over quantity. In addition to targeting high-performing platform companies, we expect buyers to prioritize long-term growth strategies
Pure multiple arbitrage plays are falling out of favor, being replaced by strategies designed to build more stable, valuable businesses that appeal to a broader market of buyers. Entrepreneurs need to adjust to this new reality by building truly integrated and scalable businesses rather than collecting disparate assets in pursuit of an EBITDA goal alone. The appetite for both new platforms and add-ons remain strong, but the definition of a desirable target is ever changing.
Explore our Roundtable Series with PE Partners to understand their 2025 outlook, as well as their tips for sellers to maximize their valuations when preparing to sell to PE.
