Private equity exit routes, like initial public offerings or corporate sales, have faced significant challenges, driving the average U.S. private equity hold period to a record high of over seven years.

According to S&P Global, several factors, including rising interest rates and a divergence in buyer-seller valuations, contributed to a 40% drop in private equity exit volumes. This drop resulted in prolonged delays for limited partners seeking distributions from their private equity investments.

Despite these challenges, the advent of a new, fast-growing exit option known as continuation funds, along with the recent Reddit IPO and a mixed, albeit generally positive, second-half interest rate outlook, has renewed optimism in the IPO market. This optimism is driving private equity firms to restart their exit planning with a refreshed set of options.

With expanding exit options, many of Highspring’s private equity clients are developing exit plans earlier in the investment cycle. Unlike the 2021-2022 merger and acquisition boom, in which exit planning began 6-12 months beforehand, these firms are now planning for as long as 18 months before exit. Historically, sell-side financial due diligence and quality of earnings were top priorities, but exit planning strategies have also evolved, expanding now to include business imperatives like IT/ERP maturity, go-to-market strategy, cost optimization and pricing structure. This shift has led to a rapid increase in expanded exit readiness needs over the last few months.

Potential buyers are now more focused on the portfolio company’s ability to drive recurring topline and bottom-line improvements instead of multiplicative expansion within their valuations. As a result, private equity firms are executing a cross-functional, multi-phase exit process starting with equity valuation readiness and ending with sell-side due diligence.