Private market investors have spent several years waiting for exit activity to return to previous levels. Deal markets have improved, yet one important feature of the current cycle remains: assets are staying in portfolios for longer.
McKinsey estimates that the average holding period for private equity portfolio companies has risen to more than six and a half years. Only 19% of companies acquired in 2021 had been sold by 2025, compared with a four year exit rate of around 30% during the previous decade.
The impact extends beyond the timing of exits. Buyout distributions fell to approximately 6% of assets under management in 2025, according to McKinsey, well below the 16% average recorded between 2015 and 2019.
For investors, longer ownership periods change the economics of the investment. When capital may remain tied up for six or seven years, the business itself has to carry more of the return.
For much of the previous private equity cycle, investors benefited from several favourable conditions simultaneously.
Interest rates were low. Debt was readily available. Valuation multiples expanded across many sectors. A business could therefore increase in equity value through a combination of moderate operational growth, leverage and a higher exit multiple.
McKinsey estimates that leverage and multiple expansion accounted for nearly 60% of buyout value creation between 2010 and 2022.
That environment has changed. Financing is more expensive and investors cannot assume that an asset purchased at one valuation multiple will eventually be sold at a higher one. Bain describes the current environment as a new era in which low prices, cheap debt and easy multiple expansion are unlikely to provide the same support they once did.
The result is a greater burden on operational performance. Revenue has to grow. Margins need to improve. Working capital needs to be controlled. Capital expenditure needs to produce an economic return. Management needs to make good decisions throughout the ownership period rather than preparing the business for improvement shortly before an exit.
A longer holding period can appear attractive because it gives management more time to develop the business. That only works when the additional time is productive.
McKinsey’s research suggests that value creation has historically been concentrated towards the end of many holding periods. For deals exited since 2019, a disproportionate share of margin improvement occurred during the final two years of ownership.
In a six or seven year investment, leaving major operational improvements until the final stage becomes increasingly inefficient. The stronger approach is to begin early.
Pricing can be reviewed from the first year. Procurement can be improved. Customer retention can be measured. Underperforming products can be reconsidered. Working capital can be released. Management structures can be strengthened and capital can be redirected towards the parts of the business that produce the strongest returns.
These changes sound ordinary compared with financial engineering. Their cumulative impact can be substantial.
Longer holding periods also strengthen the case for businesses that produce cash while they are owned.
An investment whose entire return depends on a future sale leaves the investor highly exposed to conditions at one particular point in time. Valuations, financing markets and buyer appetite may all be unfavourable when an exit becomes necessary.
A cash generating business creates another source of return. Operating cash can reduce debt, fund expansion, strengthen the balance sheet or support distributions to owners. Each of these outcomes can create value independently of an eventual sale.
This helps explain why realised cash returns are receiving greater attention across private markets.
Apollo estimates that capital calls have exceeded distributions across private equity by roughly $1.5 trillion since 2018. It argues that weaker liquidity and extended holding periods are pushing the industry back towards fundamental value creation: disciplined entry prices, operational improvement and earlier capital returns.
For investors evaluating individual businesses, the same principle applies. The ability to generate cash during ownership creates flexibility.
Extended holding periods can also expose weaknesses that a shorter investment cycle might conceal.
A company can sustain high revenue growth for several years while relying heavily on discounting or customer acquisition spending. EBITDA can look attractive while working capital absorbs most of the cash. Acquisitions can increase reported earnings while integration costs and debt accumulate in the background.
Over a longer period, those effects become harder to ignore. Investors need to understand how the business behaves through different conditions.
Does it retain customers when demand slows? Can it raise prices when costs increase? How much capital does growth consume? Is maintenance expenditure being postponed? Does debt remain manageable at higher interest rates? Does additional revenue convert into additional cash?
These questions become central when the business may need to perform for many years before an attractive exit becomes available.
Bain’s Global Private Equity Report 2026 uses a useful shorthand for the change in return requirements: ‘12 is the new 5’.
Its analysis suggests that today's buyouts may need EBITDA growth of around 10% to 12% to generate outcomes that historically required growth closer to 5%.
The exact number will vary considerably from one investment to another, but the principle is important. When leverage contributes less and valuation expansion cannot be assumed, the business has to create more value internally.
That does not necessarily require aggressive expansion. Operational improvement can come from better pricing, improved utilisation, lower procurement costs, a stronger service mix, better customer retention or more disciplined investment.
A mature company capable of improving these fundamentals can therefore offer a compelling investment case without requiring exceptional market growth.
Another consequence of an extended holding period is that capital allocation decisions compound for longer.
A poor acquisition made in year two can continue consuming management attention and capital for the following five years. Excessive distributions can leave the company underfunded. Keeping too much cash on the balance sheet can reduce returns when there are no attractive reinvestment opportunities.
Good capital allocation requires a balance between maintaining the existing business, financing profitable growth, protecting financial resilience and returning surplus capital. The longer the ownership period, the more important this discipline becomes.
For investors in cash generating projects, distributions can also reduce dependence on the final exit. Capital returned during ownership turns part of the investment result into a realised outcome rather than leaving the entire value embedded in a future transaction.
Apollo sees opportunities in what it calls under owned industrial and physical assets, including engineered components, logistics, maintenance, automation and other businesses tied to the real economy.
The attraction is partly their ability to offer cash flow today alongside opportunities for future improvement. This reflects a broader change in the way investment opportunities can be assessed.
A company does not always need extraordinary growth to create an attractive return. An established business with durable demand, healthy margins and good cash conversion can create value through incremental operational improvements over a long ownership period.
The starting economics matter. A business that requires constant external financing to sustain itself has less flexibility when exits are delayed. A company that generates surplus cash can continue investing and strengthening its position while waiting for market conditions to improve.
Time also magnifies the effect of management decisions. Over one or two years, favourable market conditions can mask mediocre execution. Over six or seven years, operating discipline becomes much more visible.
Management teams determine how aggressively a company prices its products, which customers it pursues, how it responds to inflation, where it invests and how much debt it carries. They also decide whether surplus cash is reinvested productively or spent on projects that produce weak returns.
Long holding periods therefore increase the value of capable operators.
McKinsey reports that private equity firms have more than doubled the average size of their operating groups since 2021. This reflects the growing recognition that active operational involvement has become central to investment outcomes.
The private markets environment has improved in several respects. Exit values recovered strongly during 2025 and deal activity has increased.
Liquidity constraints, however, have not disappeared. McKinsey estimates that around 16,000 buyout backed companies had been held for more than four years by the end of 2025, representing 52% of total buyout backed inventory.
That backlog provides a useful reminder of how difficult it is to predict exactly when an exit will become available. Investors can control the quality of the business they acquire much more directly than they can control the market into which they eventually sell it.
This shifts attention back towards fundamentals. Recurring demand. Sustainable margins. Sensible leverage. Productive capital expenditure. Strong management. Good cash conversion and disciplined distributions.
When holding periods become longer, these characteristics have more time to influence returns. The investment case increasingly rests on what the business can produce during ownership rather than on what another buyer might eventually be willing to pay for it.
For long term investors, that may be a healthy change.
☑️ McKinsey, August 2026: Improving Private Equity Exit Prospects
☑️ McKinsey, June 2026: Unlocking Full Potential: Five Practices Reshaping PE Value Creation
☑️ McKinsey: Global Private Markets Report 2026
☑️ Bain & Company: Global Private Equity Report 2026
☑️ Apollo: Private Equity Returns to Its Roots
