Private Equity: Short Sheet, Long Bed?

“The sheet is too short to cover the bed” is a useful old-timey expression that works for any situation in which the actors have several objectives and can satisfy some but not all of them at once.

For the past decade, I’ve thought about this in relation to the private equity business model.

Higher valuations. Target IRRs at rock bottom levels. Fund vehicles with prescribed lives dictating investment hold periods. It’s much easier to clear two of those hurdles than all three.

The dynamic isn’t new, but it has become more acute. Fixes and alternatives have become more visible.

For Greenberg Variations Capital clients and other private business owners, this has implication both for choosing the right buyer and for thinking about a retained ownership interest post-sale—the fabled “second bite of the apple.”

Let’s cover each of these points in turn.

The Dynamic

Through covid, tariffs, the advent of AI, and a host of other upheavals, here is one truth about the M&A market in the past decade: private company valuations are higher than they used to be.

GF Data, the M&A deal tracking venture I co-founded in 2005, has data on nearly 6,000 private equity-backed transactions completed in the $10-500 million value range. From 2003 through 2016, multiples of Adjusted EBITDA/Total Enterprise Value (TEV) inched steadily upward from the low sixes to 6.8x. In 2017 and every year since, the average has been in excess of seven times.

Of course, some businesses have always been more highly valued, but there’s been a pronounced sectoral shift. During the pandemic, industrial companies suffered more from supply chain issues and other disruptions. Since then, they’ve been affected disproportionately by tariffs, regulatory uncertainty, energy costs, and other risks. Service-based businesses have had their own challenges, primarily related to labor, but on balance they’ve been better positioned to forecast and achieve profitable growth.

Four business categories comprise about 80 percent of the GF Data universe: manufacturing, distribution, business services, and healthcare services. In the chart below, we grouped the first two as industrial, and the latter two as services.

Looking back to 2016, there was an artificial dip in industrial valuations as many owners of quality assets held back from sale in anticipation of a more favorable tax and regulatory environment in Washington. Since then, though, the service cohort has commanded a quarter to half turn valuation premium over the industrial group. As a result of the comparative challenges the past three years, that spread has swelled. In 2025, it reached nearly a full turn of EBITDA.

Source: GF Data

Fewer prime industrial assets coming to market has meant continued upward pressure on valuations for service operators offering some combination of scalability (e.g., commercial services) and exposure to long-term demographic trends (e.g., behavioral health).

Unfortunately for private equity sponsors, return expectations haven’t changed. Targeted rates of return in the 20 percent range can’t go lower. Investors are still favoring firms that projected a 3x multiple on invested capital (MOIC). Most LP-based funds are still set up as 10-year vehicles, which has driven average hold periods in the five-year range.

So, how will the sheet cover the bed?

The Fixes and Alternatives

Private equity has shifted in multiple ways to realign pricing, return, and investment period. Here are five:

Longer Hold Periods

The traditional private equity fund structure gives the general partner some latitude to retain some investments longer. At year-end 2025, the median hold period for the nearly 6,000 middle-market companies in PE ownership was 6.4 years, up from 5.8 years a year earlier, according to Pitchbook.

More Continuation Vehicles

PE groups continue to make greater use of continuation vehicles (CVs) organized around one or multiple assets in a given fund. A continuation vehicle allows some investors to exit on the original timetable while the general partner and others continue. According to Pitchbook, there were 44 CVs in 2021, 84 in 2023, and 147 in 2025.

CVs are not likely to be an industry-wide panacea, in large part because institutional investors don’t love them. The whole logic of the alternative asset investment class is finding superior managers and then aligning your economic interests with theirs. Clearly, the bigger and the better performing funds have more leverage in re-crafting exits as they wish.

On the broader state of play, Thao Le, a partner at Troutman Pepper Locke, shared this perspective: “As general partners seek maximum flexibility in being able to exit investments via a continuation vehicle, they’re building provisions into their Limited Partnership Agreements giving them that flexibility. In turn, limited partners, particularly institutional LPs, have become more knowledgeable about secondary transactions and are negotiating side letter rights to limit the GP’s ability to force them into a secondary deal.”

Longer Hold Funds

Some PE sponsors have embraced longer-lived funds as a way to avoid the complexities of CVs and other GP-led secondary offerings. It makes sense, not only to get more time to achieve returns, but also as a response to a more competitive sponsor environment.

In the 1990s, GTCR’s predecessor firm was able to make three successive investments in the funeral home industry, presumably confident at each exit that they “owned” the space enough to re-enter if they wished. No PE firm could act with the same presumption today. The best way to continue to monetize your franchise in medical devices or waste management or virtual education is to hang on to the platform you own right now.

Analysts have been predicting an explosion in longer-hold funds for the past few years and it hasn’t quite happened. One reason may be that the traditional time horizon works fine for most investments. It does seem fair to say that sponsors are forming more longer duration vehicles, but as a complement and not a replacement for traditional 10-year funds.

More Fundless Sponsors

We’ve been putting together our schedule for ACG’s annual DealMAX conference. It’s striking how many of the meeting requests are coming from new firms. Most of them don’t have committed capital—they’re independent sponsors or search funds or conduits for family offices.

This isn’t a new development, but it seems to be accelerating. A younger colleague says that some of this traffic is a function of his peers voting with their feet. If a firm isn’t making investments, principals and VPs in their 30s aren’t getting the economics they expected. They’ve also seen firsthand that investing from a committed pool isn’t all sunshine—it comes with headaches and constraints.

Advantage to the Long-Hold Investor

RAF Equity is a well-established family office here in Philadelphia. Under its current chairman and CEO Rick Horowitz, RAF has taken in some outside capital but continues to operate on an evergreen basis. Rick recently joined Charlie Gifford and me on our Middle Market Musings podcast. He made the observation that RAF’s portfolio returns through year five were nothing special, but the returns in years five through 15 were outstanding. It took a few years to understand the business, and to start to see returns on strategic investments.

In a nutshell, that’s it. That is the reality that the traditional LP-based fund has to live with. When sponsors were paying six or seven times EBITDA for a building products manufacturer or HVAC installer, the numbers worked. It was okay to have some growth prospects still germinating at the time of sale. At 10x, the investment logic may be as strong, but getting to a three times MOIC is going to take longer.

Implications for the “Second Bite”

For deal professionals, it’s one of the most familiar slides in the buyer’s deck. The business owner pockets X at closing and rolls over Y. Greater leverage magnifies their ownership share. The buyer projects some growth and a little multiple expansion at exit and—presto!—Y’s ultimate value could be greater than X.

Every business owner is different, but openness to continuing equity usually comes down to a weighing of two countervailing forces. On one hand, the owner’s assessment of how their business fits with a track record of past investments where the “second bite” did turn out to be a winner. On the other, the owner’s natural skepticism about the future value of an asset they have only ever known to be under their control.

It’s been interesting to see how this assessment is changing along with the evolution in the nature of buyer exits.

Here is an early read. Sellers get plenty of liquidity from the first bite. A second bite that takes a bit longer to crystallize may not be a net negative—if it fits better with the sellers’ sense of how long it takes for things to happen in their business.

Andrew T. Greenberg is CEO of Greenberg Variations Capital, an M&A advisory firm based in suburban Philadelphia, and Co-Founder of GF Data.  For more information,  please contact:  atg@greenbergvariations.com

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit acg.org.