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Private Equity Logjam
We ran across an interesting statistic recently: based on 12/31/10 data, it will take 15 years for PE firms to exit their 6,000 portfolio companies.
Of course, we don't expect the current level of 400 exits per year to stay that low indefinitely. Given an economic recovery some day, exit rates should rise as at least some sick portfolio companies get healthy enough to move off the books and the market's appetite for M&A improves.
But no matter how strong a recovery, many of these portfolio companies are in fact "walking dead" -- companies that will never generate an attractive ROI.
So the private equity industry will remain asset-heavy for some time regardless of the economy. Even when PE firms find portfolio company buyers, they hesitate to sell at the sorts of valuations that ding fund performance and scare away future investors.
They're "locked-in", hoping a better day arrives before their limited partner investors begin asking for their money back.
Sources: W Capital Partners, Thomson VentureXpert, PitchBook Data and National Venture Capital Association.
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