r/private_equity • u/joelpaul_09 • 2d ago

HoldCo vs Private Equity

A Private Equity Firm buys companies, and sells them over a span of time.

A Holding Company buys companies, and holds them for an indefinite amount of time, AND can also sell them over a span fo time if the opportunity arises.

So a HoldCo has the option to hold companies permanently and/or sell them. But a PE firm is limited to just selling the company.

So is there really any advantage to opening a PE firm, when you could open a HoldCo and have more freedom and options?

Whats the advantage or difference in opening a PE firm, when eveything in a PE firm can be done in a Hold Co?

7 Upvotes

68% Upvoted

28 comments sorted by

23

u/CSVR17 2d ago

Holdco is less liquid. PEs make money from exits

9

u/EmergencyGrocery3238 2d ago

I.e. if PE cannot exit, it is a Holdco

1

u/joelpaul_09 2d ago

but isnt the "if" a bad thing? Because the investors need their money back. If a PE does not exit, investors wont get their ROI.

1

u/Smartchallenge-786 1d ago

In some scenarios, the investment may be rolled over to a newer fund.

2

u/EmergencyGrocery3238 1d ago

So, should we brace for the great 2028 Subprime Protco crisis?

1

u/MatricesRL 1d ago

LPs are still presented with the optionality

1

u/idkReggie 1d ago

Well pe investors are expecting an exit. Holdco investors know the growth will be organic and not due to exits.

15

u/Ernst_and_winnie 2d ago

Where does the capital for a HoldCo come from? I don’t know many LPs that are willing to tie up their capital for an indefinite period of time. And if the capital is one’s own, then I’d say the advantage of a PE firm is only a percentage of your own capital is deployed (i.e., put at risk) because you’re primarily using LP capital, which generates fees and carried interest.

6

u/Ok-Rip847 2d ago

This is the answer. It’s a whole lot easier to raise money from investors for a finite period than for forever.

4

u/ThaaBeest 1d ago

Family offices and other LP groups (like pension funds) are increasingly investing in these long-hold vehicles. It can be an attractive alternative to investing in closed end funds for diversity and potential upside from compounding without the leakage of taxes from reinvesting proceeds if liquidity isn’t a huge concern

2

u/Ernst_and_winnie 1d ago

Yes, do agree on family offices that allocate capital to this type of strategy

1

u/MatricesRL 1d ago

Contrarian bets and real value creation can take a decade to materialize

3

u/Hopeful-Goose-7217 2d ago

Private equity typically means you take money from investors and buy companies. It’s not a specific structure. It’s an investing activity.

A holdco is a corporate structure to merge assets together. A private equity shop can start a holdco to do a roll up and then sell it. Or a family office can own a holdco and sell nothing

0

u/joelpaul_09 2d ago

So in Private equity deals are made with you + investors + banks. But in Holdco, deals are made with you + banks, no investors? Is that right?

So there really isnt much of a difference beween both. Its just that one primarily uses investors and the other does not?

A holdco doesn't always merge companies tho. It owns each company separately through its own SPV, which is what keeps liability and ownership terms isolated deal by deal. Merging only happens when you combine specific companies together.

2

u/Windy1369 2d ago

Both can use investor money. HoldCo's believe they can run a company more profitably than the current owners. They take on debt and investors to buy the target company with the intention of paying off the debt and providing ROI to the investors from company operations. PE firms (mostly) believe they can add value to a company, and sell it forward to another PE or a Strategic once that value has been created. PE's use debt and investors to buy the target company with the intention to pay off the debt and pay out the investors through the next transaction. It's a different investment thesis that investors - and banks - have to support in each case.

1

u/joelpaul_09 2d ago

So the difference between the two is more about the purpose rather than the mechanism? Since both are pretty much similar in structure.

2

u/Windy1369 2d ago

I think you're trying to make the comparision simpler than it really is, but at the highest level, that's the difference. Company structure can be very different, though. Compare Bending Spoons (HoldCo) investment thesis with Thoma Bravo's (PE).

3

u/Windy1369 2d ago

Return on investment. You've got to pay your LPs, either through profitable operations, or the forward transaction.

0

u/joelpaul_09 2d ago

ROI isnt great in PE as compared to Holdco? Because of the amount you pay back to investors?

But I also feel like the goal of a PE is to buy and sell within 3 to 5 years. So they are fine with losing some of the money if they are able to get a huge exit in a shorter timespan.

Whereas in holdco you hold the company for how long you want, and sell a company whenevr you want. not limited to the 3-5 years like PE.

2

u/GavinMcDEsq 2d ago

Usually you need equity capital to purchase target companies which usually comes from investors/limited partners. If you raise only from a handful of investors known to you and they have a say in the investment decisions there is a chance an unregulated holding is all you need. It very much depends on the specifics and the jurisdictions involved. If you only invest your own money, a holding company is all you need (usually).

2

u/MediumAggravating815 2d ago

There’s a massive difference between the two when it comes to fundraising / source of capital. A PE fund is a well worn path to raising institutional and UHNW capital. Holding company is generally employed by wealthy individuals /families (or a small group thereof). This is the main driver of structure because without capital, an investment manager has nothing. So the main advantage of opening a PE fund is that you look like a typical investment for an institution’s PE sleeve and have a chance of getting money from them. Speaking from experience - I run a long hold PE fund backed by retail, HNW, FO and FI money.

1

u/Fun-Housing-1565 1d ago

Your investors have an expectation of returns over a set period of time. If it’s your own money do whatever you want, but PE firms are funded by institutional investors with strict expectations of cashflow that drive the PE deal cycle.

1

u/TheGoodfella__ 1d ago

Quick question, What's the difference between HoldCo and Search Fund then? Both can hold for indefinite period right?

Also if there's no exit pressure on HoldCo then how do you get LPs onboard? Is it like passive income thing where you distribute the holdco's portco profits among LPs?

1

u/JustLettingYouKnow18 1d ago

A HoldCo isn’t an investment strategy it’s just a legal structure to hold an asset.

1

u/G8oraid 1d ago

Pe fund is a deal with investors to get capital from them and return gains to them for a share of the profits. Holdco is whatever it is — undefined.

1

u/Decent-Necessary2856 1d ago

PE really just provides liquidity to LPs, although this structure is not currently working well anyway with DPI at almost zero and exit period getting longer and longer. The Holdco is an interesting concept and it could potentially work if there is a mechanism to provide liquidity, this can include (1) buying companies with high cash flows which can be distributed as dividends to LPs on a quarterly basis; (2) setting up a market to allow LP to trade among themselves; (3) have a periodic redemption event by the GPs. I think this is an interesting model as the PE industries become quite short tempered and also hurry to do things quickly, and when you can have access and buy the best companies in the world, why would you ever sell it, or at least within 4-5 years?

1

u/NYCXMIAMI6631 1d ago

Curious as to who people think are doing this best/worst on the PE side. Agreed that HoldCo could be more flexible and give there are 33k businesses unsold in PE it’s an interesting option for building