Private Equity Exits Face New Reality as Sponsor-to-Sponsor Deals Plummet, Lee McCabe Reports

In a recent LinkedIn post, Lee McCabe discusses a significant shift in the private equity landscape, highlighting a dramatic decline in sponsor-to-sponsor exits and the new demands placed on portfolio companies. McCabe, drawing on S&P’s H1 data, points out that the traditional “pass-the-parcel” exit strategy, where one private equity firm sells to another at a slightly higher multiple, is no longer a reliable path to liquidity.

The Ebbing Tide of Sponsor-to-Sponsor Exits

McCabe’s analysis reveals a stark downturn in deals between private equity firms. According to S&P’s H1 data, sponsor-to-sponsor exits plummeted by 57% last quarter, reaching $24.5 billion. The number of such deals also hit a decade low, with only 94 transactions recorded. This trend is part of a broader global exit slowdown, with US exit values nearly halving in the last quarter alone.

For two decades, this model allowed firms to profit without necessarily improving the underlying businesses. As McCabe articulates:

“For twenty years the pass-the-parcel trade papered over a lot of average work. Buy at 10x, hold five years, sell to the next fund at 12x. Nobody had to prove the company got better. The next buyer’s leverage did the talking.”

The New Due Diligence: Proving Value Creation

The current economic climate, characterized by expensive debt and reset valuations, has fundamentally altered the buyer’s perspective. McCabe argues that the next buyer is now asking critical questions that were previously overlooked.

Shifting Market Dynamics

The ease with which firms could previously exit is gone. McCabe notes the key factors contributing to this change:

• Debt is significantly more expensive.
• Valuations have been recalibrated to market realities.
• Buyers are scrutinizing operational improvements and genuine value creation.

As McCabe puts it bluntly, referencing Bain’s midyear report which advises firms to “control the controllable”:

“If your portco can’t show margin expansion, pricing discipline and a sales engine that works without the founder’s phone book, no exit route is going to bail you out.”

The Un glamorous Work of Real Value Creation

McCabe emphasizes that with traditional exit routes becoming less viable, the focus must shift back to fundamental operational improvements. Corporates are unwilling to overpay, the IPO market demands proven performance, and other private equity firms are facing the same challenges.

The consequence of this shift is evident in holding periods, which are stretching considerably. McCabe highlights the precarious position many firms find themselves in:

“Holds are already stretching to 12 years for some firms, not the 5 in the model. The maths of waiting doesn’t work.”

Ultimately, McCabe concludes that the firms best positioned to navigate this challenging cycle are those that focused on the “unglamorous operating work” in the early years of their investment. The remaining firms, he suggests, are left holding assets that are increasingly difficult to divest, as the “parcels nobody wants to be passed” accumulate.