The Fund Clock Always Wins

The company checked every box. Fragmented industry, sticky customers, a founder's systems straining under growth nobody had planned for. The seller was a private equity fund in year ten of a ten year life. The partner running the process told me the price had room. The banker told me the timeline did not. I have sat across from plenty of motivated sellers. This was the first time the motivation was a calendar.

Nobody on the sell side pretended otherwise. The deal team knew the business had work left in it. They had an ERP migration half finished and a pricing project maybe eighteen months from paying off. None of it mattered. The fund's life was ending, the LPs wanted their capital back, and the firm was in market raising its next vehicle. The asset was leaving whether the work was done or not.

The banker's phrase was timeline certainty. I have heard price certainty. I have heard close certainty. Timeline certainty was new, and it told me everything about who the process was actually for.

We ended up passing, for reasons that had nothing to do with the seller's clock. But I kept thinking about the deal team on the other side of the table. They were good investors executing a forced decision, and they knew it. The structure they operated inside had made the decision for them years before anyone sat down.

An Eleven Year Line

That process came back to me when I saw the number. There are more than 13,000 unsold portfolio companies sitting in US private equity funds right now. At the current pace of exits, that is roughly an eleven year line. The average fund is built to live ten.

Sit with that for a second. The industry is holding more inventory than its own structure can clear, and the structure is the product. Capital was raised on a ten year promise. Companies were bought with models that assumed a five year hold and a willing buyer at the end. Then rates moved, buyers got selective, and the IPO window narrowed to a crack. The market changed. Most of the plans did not.

The industry's response has been creative. Continuation vehicles, NAV loans, minority recaps, dividend recapitalizations: an entire toolkit for holding on longer. I understand why every one of those tools exists, and each one buys time. But when a continuation vehicle needs a meaningful discount to attract new money, the loss has already happened. The paperwork catches up later.

The business had eighteen months of work left in it. The fund had zero. The fund won.

Paul W. Swaney III

What the Clock Does to Decisions

The backlog is the visible symptom. The quieter damage happens inside the portfolio, in decisions nobody puts in the board deck. A fund clock distorts judgment at both ends of the hold. In year two, everything looks fixable. In year eight, almost nothing worth doing gets approved, because the payback lands after the intended exit.

I have watched this from the inside. At one company, years back, a maintenance investment got cut because the return arrived past the exit window. The equipment failed within a year of the sale closing. The buyer paid for the deferral, then paid again to fix it. Everyone acted rationally inside the structure they were given. The structure produced a worse company.

A surprising diligence item I now check on every deal: roofs. Pull the CAPEX plans from the last several years and the roof shows up in every one of them, always two years out. Nobody defers it on purpose. It just never wins the budget fight against a machine that makes money or a hire that grows revenue. So the roof waits, the hold period runs, and the buyer inherits a six figure problem the model filed under maintenance capex. Now I put someone on a ladder before I trust the add-backs. What a company keeps deferring tells you more about the seller than what it spends.

Management teams learn to read the clock too. Ask any operator who has worked under a sponsor in year seven. Hiring slows. Capex requests come back with questions that are really answers. The CEO starts managing the exit narrative instead of the business. None of this shows up in the model. All of it shows up in the company.

The distortion runs upstream as well. Deals get done in year one and two of a fund that would never clear the bar in year four, because deployed capital is what justifies the next fundraise. The clock pressures the buying and the selling both, and the companies absorb all of it.

Multiple Expansion Was the Plan

For a long stretch, none of this mattered, because the exit market forgave everything. Buy at eight times, hold five years, sell at eleven. Cheap debt did the rest. On paper that looked like value creation. A lot of it was tide. When multiples rise across the board, mediocre operations get marked up along with great ones, and the difference between the two only becomes visible when the tide stops.

It stopped. The 13,000 company backlog is what the ledger looks like once multiple expansion comes out of the equation. What remains is the value you actually built: earnings growth, pricing discipline, systems that work, a management team deeper than one heroic operator. If those are in place, a buyer will pay for them in any market. If they are missing, no amount of waiting brings the old price back.

This is why I spend my time on operations rather than financial engineering. The debt paydown math works or it does not. The multiple at exit is a guess. The EBITDA bridge is the only part of the return I can influence every single week of the hold.

The Deal With No Clock

Here is where my seat differs. As a fundless sponsor, I underwrite one company at a time. Each deal has its own capital, its own investors, and its own timeline. There is no fund in year eight forcing a sale, and no fundraise next quarter that needs a marked up exit to anchor the pitch.

When a project pays back in year three of what was supposed to be a five year hold, I can approve it in year four. If the market is closed when the plan said sell, we keep compounding until it opens. My investors chose the specific company they own. If it is performing, most of them would rather hold a good business than recycle into an unknown one. That conversation is available to me because the structure allows it.

I will be straight about the tradeoff. Raising capital deal by deal is slower and harder than drawing down a fund. I earn nothing on committed capital I do not have. Every deal starts from zero. That is the cost of the model.

The benefit is that I never have to sell a company because of a birthday. The 13,000 companies in the queue were all bought by smart people with good models. The models just assumed the clock would never matter. It always does.

Sell when the business is ready and the market is open. On a deal by deal basis, that is the only clock running.

Paul Swaney is the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.