Private Equity Firms Are Slow to Sell Holdings Amid Higher Rates

Here’s a normal thing that happens. You buy a house, renovate it, throw a housewarming party, and you stay there. For a long time. Pretty typical, right?

Well, yes. But what if the people who lent you money to buy the house don’t get repaid until you sell? If you hang on to the property, they’re stuck.

That, in a sense, is the situation in which the private equity industry finds itself. The firms are holding on to the businesses they acquire for increasingly long periods, and their investors are waiting for their payoff.

Private equity “exits”—via sales or initial public offerings—have fallen to their lowest level in a decade, excluding the pandemic-hit second quarter of 2020, when the global economy stalled. “This slowdown came on the heels of such a hot year in 2021,” says Emily Anderson, managing director of sponsor coverage at the investment bank Union Square Advisors LLC. “We had Covid, lots going on in the political environment, interest rates, the Silicon Valley Bank crisis, the war in Ukraine—that’s a lot of hits for one market to handle in a short time horizon.”

To be clear: Private equity firms do want to sell. But only for the right price. And caution is rampant among buyers—including the firms themselves. Every year a fair portion of companies sold by PE firms are bought by other PE firms. Today those firms are sitting on a record pile of unspent capital: about $1.5 trillion, according to Preqin Ltd., the investment data company. Since most deals are at least partly debt-funded and interest rates are high, private equity barons are less eager to open their checkbooks.

Amid all of this, those who’ve staked money in private equity want to see some of that money returned. That’s prompted PE firms to rifle through their portfolios to find non-plum assets to sell, even though, all things being equal, they’d probably rather wait and get a higher price further down the line.

A few are eyeing IPOs, even as the market remains tepid. SoftBank Group Corp. is targeting a prospective $60 billion September listing for its semiconductor unit Arm Ltd.; L Catterton wants to take Birkenstock to market at an $8 billion valuation at around the same time. They’ll be big tests to see if things might just start to loosen up.