How can LPs be sure that independent sponsors will actually exit in ~5 years?
1) debt maturity. Most deals have 60-month loans that force some sort of balance sheet recap, at least on the debt side.
2) Sponsor economics. For deals that drag on (7-8 years), they are either really strong (“let’s keep going”) or performance has failed to materialize as expected (“not ready yet”). Either way, the independent sponsor is incentivized to exit soon. There's either (a) opportunity cost (time) in being stuck in a deal that won't yield (much) carry or (b) an irresistible amount of carry tied up if the deal is epic.
Ps. Vintage affects average holds. Some cite 5.5yrs as the average hold period, but this figure is probably different for deals that started in 2016-17 (and had very favorable exit conditions in 2020-2022) vs. deals that were bought at the apex in 2021 (hence all the current headlines about illiquidity in PE).
