Private Equity Firms Holding Onto Buyout Funds Reaches High, but Anticipated Lower Interest Rates May Accelerate M&A Activity by Mid-Year Due to Reduced Cost of Debt

By: Dax Cohan

Concerns around rising interest rates have caused many private equity firms to hit the pause button with their buyout funds by holding onto their assets historically longer. As the cost of incurring debt increased, PE firms saw their buyouts scaled back. Further, a widening chasm between buyers and sellers regarding valuation led to deal stagnation at a time when the cost of debt rose.

Private equity firms averaged hold periods of more than seven years for buyouts in the US and Canada in 2023. This is a substantially longer time frame than from 2014 to 2023 when the average holding period was 5.8 years. In the preceding decade from 2003 to 2013, the holding period of PE buyout funds averaged less than five years. The lengthened time horizon for buyouts has had a precipitous effect on overall North American exit values amongst private equity firms, from $450 billion in 2021 to $303 billion in 2022. As of November 2023, the exit value was $175 billion.

Now, as the Federal Reserve has halted interest rate increases, private equity firms that have grappled with high borrowing costs are expected to benefit. With fears of a recession dissipating and an expectation that interest rates will come down, M&A activity may escalate in the second half of 2024. As interest rate increases are halted, optimism is anticipated to return to the private equity market, driving stability and a narrowing of the bid/ask spreads between buyers and sellers. It may be wise for owners considering a near-term sale to ready themselves for more intensive opportunity in the second half of 2024.

Prequin Pro holding periods of buyout funds