The average PE hold period is getting longer. According to data provider Preqin, PE firms held on to European assets for an average of 5.65 years in 2017, up from 4.41 years in 2007. Extended hold periods have been driven by a number of factors, including the raising of longer-term PE funds by some of the larger general partners and the increase in direct investment by limited partners with long-term investment horizons (such as pension or sovereign wealth funds). As hold periods increase, some management teams have begun to ask PE firms for the right to exit their investment before the PE fund exits. In our view, this could mark the beginning of a trend, and one which should be monitored closely as early liquidity rights can create misalignment between sponsors and executives.
In the past, portfolio company executives very occasionally requested “put” options to sell shares in exceptional circumstances (for example death or permanent disability) and early liquidity rights have been a feature of infrastructure fund deals for a while. However, the concept of early liquidity has expanded into PE deals over the past 12 months as executives look to avoid being locked in for long periods with PE sponsors. We are increasingly seeing examples of early liquidity rights being asked for by management teams and, in a number of cases, conceded to by PE sponsors.