PE Beat: Hold It Forever

Hold It Forever

Mike Hollander thinks the industry plans its exits too early. "What we say at GTCR, though, is when we buy a business, we buy it for an indefinite time frame. And we want to treat it like we're going to hold it forever."

The GTCR managing director's case is the scoreboard. "if you look at our industry as a whole, we unfortunately have done a pretty terrible job at returning capital to our limited partners." His figure: "I think the stat is our industry is returned just a bit more than 10% of NAV per year to LPs from 20 to 25." Funds raise every four or five years; ten percent a year returns the money over ten. Locking in a three-to-five-year exit at purchase, he argues, is how managers ended up there. "Let's focus on building great businesses and for great businesses, the exits will happen."

The big firms that kept a clock moved it from the deal to the fund. Permira used to let each deal team decide when to sell. "Now instead once a year in March, we looked at all of our mature portfolio companies." Riccardo Basile, its head of value creation, now weighs what the fund needs, not just what the asset can fetch. BC Partners puts every asset in front of a review committee at least twice a year, which COO Fahim Ahmed runs on "the old investment adage of holding is buying at today's price."

The window they are looking for is narrow. Neil Kalvelage of Centerbridge: "when are we far enough into that value creation plan that the results are proven. And yet there's still more upside left for the next buyer." Helen Lee Bouygues of Ardian on what buyers check once a process opens: "There's no excuses. There no forgiveness in today's market."

Sequoya Borgman built a firm on having no fund clock at all. Borgman Capital has done 22 deals in a decade, each in its own vehicle rather than a committed fund. "Sellers don't like the disruption it does to their business and their employees." His pitch is to "get the sellers comfortable with us not being flippers". The funds are noticing. "And you actually see a lot more funded PE shops going down the special purpose vehicle route these days just because of that flexibility and able to exit and along their own timelines."

Patience is not the same as never selling. Borgman's usual exit is to "sell to a bigger private equity firm or a bigger, maybe a strategic buyer down the road". Jason Reid went the other way. He grew a construction business to "about 280 staff across 12 different companies I had acquired", planned a roll-up on SBA loans, and found refinancing them "just too complicated." He ended up selling a big chunk of what he bought.

Last week the owners who never sell were the competition. This week the funds want their calendar.

Sources: Interviews from Private Equity Spotlight (Sep 29, Mike Hollander of GTCR, Riccardo Basile of Permira, Fahim Ahmed of BC Partners, Neil Kalvelage of Centerbridge and Helen Lee Bouygues of Ardian), The LAB: Value Creation in PE (Sep 30, Sequoya Borgman of Borgman Capital), and Think Like an Owner (Sep 29, Jason Reid).