Private Equity Houses Face $3.6 Trillion Portfolio Indigestion as Exit Routes Narrow

Private equity firms are grappling with a mounting challenge as they collectively hold onto approximately £3.6 trillion worth of unsold companies, according to recent findings from management consultancy Bain & Company.

The traditional buy-improve-sell model that defined private equity’s success is showing signs of strain in the current market environment. Industry giants like Blackstone, KKR, and CVC Capital Partners are experiencing unprecedented difficulties in divesting their portfolio companies, leading to what industry insiders term as “indigestion”.

The shift in strategy has become evident as major players pivot towards alternative approaches. Marc Rowan, Apollo Global Management’s chief executive, emphasises providing “long-term capital” through debt funds, whilst KKR expands its footprint in infrastructure and property investments, typically characterised by longer holding periods.

Several high-profile UK cases illustrate this trend. CVC’s decade-long ownership of Moto Hospitality, initially acquired for £400 million, now seeks an exit at a valuation between £2 billion and £3 billion. Similarly, TDR Capital’s 12-year investment in David Lloyd Gyms struggles to find closure, with current valuations ranging from £1.8 billion to £2.3 billion.

The market’s complexity is further demonstrated by Space NK’s situation, where owner Manzanita Capital’s 23-year holding period has seen multiple unsuccessful exit attempts. The premium beauty retailer’s latest sale effort, targeting £300-400 million, marks their third attempt at finding a buyer.

Rising interest rates and geopolitical tensions, particularly following Russia’s invasion of Ukraine, have significantly impacted the deals market. These factors have forced private equity firms to adapt their strategies, focusing more on operational improvements rather than quick exits, marking a significant shift in the industry’s traditional approach.