The longer PE hold: why management alignment matters long before exit
For much of the past two decades, private equity-backed management teams could reasonably plan around a three-to-five-year ownership cycle. That timetable is becoming less predictable.
Our latest M&A and PE Market Trends Report, which was published earlier this year in conjunction with Pinsent Masons and Wiispa, found that six and seven-year hold periods are becoming increasingly common. Given the current economic environment and macro factors outside of their control (from COVID-19 to geo-political conflicts), investors have found it harder to deliver or demonstrate the value growth envisaged in their original investment cases, while prospective buyers (both PE and trade) have become more selective and disciplined in terms of pricing opportunities. Valuation gaps and limited appetite for UK IPOs have also constrained exit opportunities.
Much of the debate about increasing hold periods has centred on the impact on private equity firms and their investors. However, a longer hold also materially changes the equation for management teams.
Incentive arrangements, which typically have to clear a fixed annualised hurdle before they accrue value, may have been agreed at the outset when the plan was to sell within a five-year hold period. As the clock ticks and the hurdle compounds up, it has become harder to sustain motivation over a longer period. The company's strategy may have evolved, new executives may have joined, and the original management team may have invested considerably more time (and tied up their capital) for far longer than first anticipated.
The eventual transaction may not take the form of a straightforward sale either. Continuation vehicles are increasingly being used to provide liquidity for some investors while allowing sponsors to retain exposure to attractive assets. Our report also highlights greater use of minority reinvestment structures, while secondary buyouts accounted for 43% of the PE deals surveyed in 2025, up from 31% in 2024.
For management, these structures can mark the start of another ownership cycle rather than a clean exit. The senior team being backed by a new Investor will typically be expected to reinvest up to 50% of their crystallised proceeds, accept a new incentive package and commit to delivering the next stage of the growth plan, sometimes under a new sponsor or alongside a reconfigured shareholder base.
For some executives, a delayed exit is about more than economics. A management team that expected liquidity after four or five years may now face the prospect of committing to a business for significantly longer. Alignment therefore extends beyond equity participation and into broader discussions around leadership succession, personal objectives and the time horizon for eventual value creation.
That is why management alignment should be addressed well before a formal exit process begins.
The headline amount of equity available is important, but it is only one part of the overall package. Management teams also need to understand how much they are expected to reinvest, how future value will be shared across the existing team and future hires, whether their equity could be diluted and how leaver provisions, warranties, governance rights and role expectations will operate during the next phase.
Once an auction or bilateral sale process is under way, the timetable is often being set by shareholders and prospective buyers. Management teams that have already established their priorities are better placed to evaluate the options and negotiate from an informed position.
Recent findings suggest that high-quality management teams continue to be highly valued. Average sweet equity allocation increased from 15.2% in 2024 to 16.5% in 2025, despite a relatively muted market for new PE platform deals. This may indicate that investors were prepared to offer greater potential upside to secure the leadership teams behind prized assets.
However, we have also seen investors looking to nudge up the coupon or hurdle that they apply to their equity (normally through the use of shareholder debt) before sweet equity starts to participate. Over 5 years, the compounded impact of a shift from a 10% hurdle to 12% increases the multiple of investment (money multiple) that needs to be returned before the sweet comes into the money from 1.6x to 1.76x. If an investor has £200m invested, and management have 16.5% of the ordinary equity as sweet, this would reduce their pot by c£5m.
The wider market backdrop makes early preparation even more important. A substantial backlog of private equity-backed businesses are awaiting exit, while sponsors continue to hold significant amounts of undeployed capital. As valuation expectations continue to adjust and pressure builds to return capital to investors, transaction activity is expected to increase, although timing and market conditions may remain uneven.
Longer hold periods are not necessarily a negative. They can give businesses more time to invest, consolidate and create value. But the longer the journey, the more important it becomes to ensure that management and shareholders remain aligned on the destination, and on how the value created along the way will be shared.
The right time for management teams to revisit that alignment is not after the bids arrive. It is before the exit window opens.
