The Carry - Issue #03 - No Exits? No Problem

Welcome to this week’s edition of The Carry - the newsletter that gives you all the best stuff from middle-market private equity in just 7 minutes a week.

Estimated Read Time: 7 min (as promised)

Deal of the Week

The Play: Agellus Capital has launched Bluejack Fire Holdings by acquiring three fire-and-life safety companies: FirePro Tech (Houston), Chase Fire (New York), and AAA Fire Protection Services (San Francisco Bay Area). (wsj.com)

Why It Matters: The fire-and-life safety sector is hot (pun intended). With strict safety regulations, there's consistent demand, making it a fragmented market ripe for consolidation.

The Numbers:

• Fund Size: Agellus's debut fund closed with $400 million.

• Deal Count: This marks the second major investment from their inaugural fund.

Who Wins/Loses:

• Winners: Agellus Capital, for expanding its portfolio in a high-demand sector.

• Losers: Smaller, standalone fire safety companies facing increased competition from consolidated entities.

Mid-Market M&A Scorecard

Total M&A Activity: The data is in. Global deal count decreased by 13% in January compared to December. But it held steady year-over-year with just a 1% decline. (ropesgray.com)

Valuation Trends:

• Strategic Buyers: Deal count fell by 20% from December but remained unchanged year-over-year.

• Sponsor Buyers: Deal count remained steady month-over-month.

Top Acquirers:

• Agellus Capital: For its investment in the fire-and-life safety sector.

Biggest Exit:

• Bluebird Bio: Announced plans to go private in a $29.16 million deal with Carlyle and SK Capital Partners. (reuters.com)

Investment Theme of the Week: PE firms holding onto assets longer - what it means

📉 Private equity buyout portfolios are aging—and hitting record highs. According to PitchBook, 30%+ of PE acquisitions are now being held for over 5 years. Which makes this the longest hold period we’ve seen in the last decade. (PitchBook)

So why is this happening? And more importantly—what does it mean for PE firms, investors, and companies looking to be acquired? Let’s break it down.

Why This Is Happening

1️⃣ The Exit Window Is Stuck

• IPOs are few and far between right now. 2021’s IPO boom seems like a distant memory. And public markets in general still aren’t friendly to PE-backed companies looking to list.

• This means strategic buyers have to be more cautious than in recent years. Throw in high interest rates and recession speculations and the result is corporates that aren’t aggressively buying like they were pre-2022.

• Well, what about secondary buyouts? There’s still activity, but at lower multiples. Because of the down valuation market, PE firms are holding to assets longer than they have been in the past.

2️⃣ Fundraising Pressures Are Real

• LPs want distributions (obviously)—they committed capital to funds hoping to get it back within the standard 5-year deal cycle.

• But with exits slow, firms are delaying distributions. And keeping assets in their portfolios longer.

3️⃣ Continuation Funds Are the New Exit Plan

• Instead of selling outright, PE firms are using continuation vehicles to roll over ownership of strong-performing assets.

• Example (which we highlighted last week): PSG Equity just launched a $2B continuation fund so they could keep holding six of their portfolio companies.

🏢 What This Means for PE Firms

🔹 Longer hold times = different return outlooks.

• The old model “buy, improve, flip in 3-5 years” fading.

• Firms are planning on longer-term value creation, operational improvements, and bolt-on acquisitions instead of rushing to exit.

🔹 LP relationships are tense. Investors expect capital back within a 3-5 year window. But now they’re being forced to wait at the moment. To get back some liquidity, LPs are turning to the secondary market to sell their stakes in funds early.

🔹 Firms with flexible capital are winning. And the ones with a longer-term outlook are in a good spot right now. Firms with dry powder and a long-term vision, they can be patient and ride out market volatility—instead of selling at a discount.

🏢 What This Means for Target Companies (If You’re Being Acquired)

🔹 If you’re hoping for a quick flip, think again. Buyers are shifting their approach. They aren’t looking for a fast turnaround play. They’ll be looking for assets to generate steady, long-term cash flow (at least until the exit market bounces back).

🔹 Look for more bolt-on acquisitions to happen. Firms aren’t rushing to sell off portfolio companies. But they might be in the market for smaller add-ons to make the businesses even stronger before exiting.

🔹 Your growth runway might be longer. And longer runways = less pressure on immediate scaling. Longer hold periods mean more time for gradual, sustainable company growth.

🔮 The Big Picture

💡 We’re entering a new era of private equity. And it’s anybody’s guess how long we’ll be here.

• Quick flips? Less common.

• Longer hold periods? The new normal.

• Creative exits like continuation funds? Becoming a go-to strategy.

For PE firms, this means rethinking exit strategies and managing investor expectations. For acquisition targets, it means buckling up to have a longer-term partner.

Quick Hits: Other Notable Deals & Industry Moves

• Fundraising News: Madison River closes $370 million fund, targeting lower middle-market investments. (privateequitywire.co.uk)

• Leadership Move: Bill Ackman's Pershing Square offers $900 million to boost its stake in Howard Hughes Holdings. (houstonchronicle.com)

• Industry Shift: KKR faces challenges with its FiberCop acquisition in Italy, highlighting how tricky international telecom investments can be. (ft.com)

The Exit

That’s a wrap for this week’s edition. And what an edition it was.

We covered Agellus Capital's strategic moves in fire safety, looked at some of the latest M&A trends, and explored why PE firms are holding assets longer than ever. We even touched on some key industry shifts.

Got thoughts on this issue? We’d love to hear them! Hit "reply" and let us know what you liked, what you didn’t, or what you want to see more of. We’re building The Carry to be the must-read for mid-market PE pros—and your feedback helps make it even better.

Ok, talk to you next week.

📢 Disclaimer: The Carry is for informational and educational purposes only and should not be considered financial, investment, legal, or tax advice. Nothing in this newsletter constitutes an offer, recommendation, or solicitation to buy or sell any financial assets. Private equity investing is complex and involves significant risk.

Always do your own research and consult with qualified financial professionals before making any investment decisions. The Carry and its authors assume no liability for financial or investment outcomes based on the information provided.