The Delayed Private Equity Exit Strategy – What’s a Limited Partner To Do?

The Private Equity Investment Horizon Has Gotten Longer

Global private equity (PE) has experienced a tough few years since 2021, “exiting an era of exuberance and entering a new period of uncertainty,” according to S&P Global in 2022.

Signs of potential recovery and an “emerging from the fog” finally came in 2024, with McKinsey reporting that global PE exits had increased 7.6% YoY to $813 billion. In the US, Pitchbook recorded an estimated 1,501 PE exits with an aggregate value of $413.2 billion, marking a 49% improvement in value and a 16.6% improvement by count YoY.

Despite the positive outlook, the average holding period was still 6.7 years in 2024. The backlog of PE-backed companies awaiting exits is currently the highest it has ever been since 2005, and it continues to grow globally.

In the US, PE inventory has swelled from nearly 3,000 companies in 2018 to 11,800 in 2024 — 35% of which have been held for longer than five years. At current exit rates, this would represent a nearly eight-year inventory.

Exits are the lifeblood of PE, as they enable the return of cash to investors and free up capital that can be re-invested into new funds. While 2025 is primed for increased deal and exit activities, the exit backlog remains a challenge that investors must be cognizant of.

In light of these trends, what is a limited partner with a limited time horizon to do?

Rethinking IPOs as a Private Equity Exit Strategy

Private equity funds have traditionally provided liquidity to their limited partners by taking a larger portfolio company public via an Initial Public Offering (IPO).

However, the private market has increased in popularity over the past several years. There is currently a backlog of unicorn tech startups that are choosing to remain private for longer.

In 2024, IPOs remained a challenging exit strategy globally, falling 7% YoY in value and 20% in volume.

The US IPO market has seen steady signs of improvement compared to 2022 and 2023, which were the weakest the IPO market had been since the global financial crisis. Some experts are gearing up for optimism in 2025, but this will rely on several key factors playing out, including:

• Recovery in stock market valuations
• Continued reduction in interest rates
• Strong recent performance in IPOs driving further demand
• Expectations of economic stability
• Market recovery extending to sectors beyond tech
• Investor confidence
• Positive PE and VC trends
• Rapid adoption of AI tech
• Strengthening M&A activity

While these are welcome trends, it’s important to note that IPOs made up 5% of global PE exits in 2024. As companies grow and valuations rise, fewer sponsors or corporations can afford to purchase them.

As such, many PE funds are exploring the private secondary markets to give LPs their returns and free up capital.

The Rise of Secondary Exits

In a secondary exit, a PE firm sells its ownership in a company to another PE firm. These are also called secondary buyouts.

 With LPs’ growing demand for liquidity and exits remaining backlogged, secondary buyout activity has increasingly become a liquidity solution for PE firms. In 2024, the value of secondary transactions rose to an all-time high of $162 billion, a 45% increase YoY.

There’s a school of thinking that buyers should be suspicious of invitations to invest in a company that has already raised capital from PE investors. After all, what more could the buyer do for the company, especially if it hasn’t yet burned all the capital from the first raise?

Yet as companies stay private for longer, secondary buyouts are an increasingly common exit strategy. This is an inevitable trend as there are fewer and fewer companies that have not been backed by private equity. There are more PE firms today with more capital to invest than ever. This naturally increases the possibility of a secondary exit.

These investments can be attractive when considering that their time horizons are often shorter than initial round raises. Firms can easily justify being second to the table when they add value by addressing areas of expertise or concern that the last PE firm did not.

The Exit to Corporates Strategy

Exit to corporates is another alternative exit strategy to going public. This is when a company is sold to a strategic buyer, typically a larger corporation in the same industry.

Exits to corporates performed even better than secondary exits in 2024, accounting for nearly 55% of US PE exit value, and close to 62% when public listings were excluded.

Corporates have the advantage of more cash reserves and greater borrowing capacity compared to PE firms. They generally have better credit ratings and can raise capital by issuing bonds. As such, Pitchbook expects exits to corporates to continue leading exit strategies in the coming years.

Going Private

Public to private (P2P) or take-private deals are another strategic play for PE firms. This is where a PE firm acquires an undervalued public company before taking it private.

Going private allows PE firms to make bold moves to improve operational efficiencies and unlock value without being constrained by shareholder scrutiny.

In recent years, P2P transactions have increasingly dominated the high end of the market. In 2024, P2Ps accounted for nearly 50% of all North American deals valued at $5 billion or more.

The US stock market is heavily concentrated on a small number of technology stocks. This has meant that businesses outside of a few tech giants are often overlooked and undervalued. As such, PE firms that can identify listed companies with growth potential have an opportunity to capitalize on their lower valuations.

Take-privates can be an attractive deal for companies that rushed to go public in 2020 and 2021, the years when IPOs boomed, and have since seen their stock prices plummet. When faced with the pressures and costs of being publicly listed, these companies are often tempted by PE offers to transition into private ownership.

It’s All About Value: Keeping LPs and GPs on the Same Page

While there are positive signs of improvement to come, the bottom line is that PE firms still have to meet the liquidity demands of LPs who want to see their returns. While many general partners (GP) are stalling in hopes of a better payout later down the line, the pressure is on them to find creative ways to generate liquidity.

The emphasis has been firmly placed on value creation for both GPs and LPs. LPs must turn to value creation over longer investment periods and consider exit options more thoughtfully. On the other hand, PE firms must be robust in adapting previous strategies to drive value, in a global economy that still remains uncertain.

We think you’ll also like:

1. Crash Course: Private Equity Funds, Sponsors, and Investors
2. What Is Private Equity? A Brief History
3. 6 Things to Consider When Selecting a Private Equity Investment

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Real Estate Investing 101
2. Earning Green by Investing Green: Dialogue on the Overall Due Diligence
3. Tech Talk: Current Opportunities for Investing

This article was originally published on July 26, 2023.]

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.