What is the 'holding period', and which hold period is typical?
The holding period is the time between investment and exit. It is a main driver of IRR — at the same MOIC, a shorter hold delivers a higher IRR (time value of money).
| Hold | Use case | Typical IRR |
|---|---|---|
| 3–4 years | Quick flip (rare, opportunistic) | 25–30% |
| 4–5 years | middle-market standard | 20–25% |
| 5–7 years | Standard PE | 18–22% |
| 7–10 years | Buy-and-Build, long-term | 15–18% |
Deep diveShow more details
| Hold period | MOIC required |
|---|---|
| 3 years | 1.73x |
| 4 years | 2.07x |
| 5 years | 2.49x |
| 6 years | 2.99x |
| 7 years | 3.58x |
At 7 years the sponsor needs 3.58x — substantially harder than the 2.49x for 5 years. Compounding takes its toll.
The sponsor optimizes exit timing between "enough EBITDA growth realized" and "compounding advantage not yet lost to time". In a volatile market the hold can be extended to wait out multiple compression — continuation vehicles are the typical tool for that.
A sponsor under fund-lifecycle pressure (Year 8–10 of a 10-year fund) has to exit — which limits market timing. The 5-year assumption is often carried into the model uncritically.
Question: "Why is 5 years the standard?"
Answer: "It balances IRR optimization and value creation. Under 4 years there isn't enough operational improvement to show; over 7 years time decay eats the IRR. 5 years is the sweet spot — the market has settled around that median"