The quarterly board meeting of a sponsor-backed business is winding down. It is the seventh year of a hold that was underwritten for five, and the exit has moved again. Then the CFO asks the operating partner for something small: a copy of the current waterfall at today's valuation. The usual reflex is to read that as sale preparation. It may be something else. She may be working out whether the equity that was supposed to make her rich is still worth anything.
Management can usually run that calculation before the sponsor does. The leaders know the plan terms, they know what the business is earning, and they can see where the instruments ahead of them have grown to. From the sponsor's chair, the incentive plan is a line in the model that was set at close. From the CFO's chair, it is the reason she stayed.
How many holds have outlived their plans
McKinsey, using PitchBook data, estimates that 16,000 buyout-backed companies globally have been on the books for more than four years. That is 52% of inventory as of 2025, the highest on record. The average holding period has reached 6.6 years, against a 6.1-year average from 2011 to 2020.
Buyout-backed companies held more than four years, 52% of global inventory as of 2025 and the highest share on record.
McKinsey & Company, March 17, 2026, based on PitchBook dataPitchBook's August 2026 note on private equity's zombie problem defines a zombie as a company that "remains operational and solvent but lacks a credible path to achieving its targeted return or a timely exit." It counts 2,536 US portfolio companies at or beyond the traditional five-to-seven-year exit window as of June 30, 2026. Of roughly 2,500 platform buyouts done in 2021, 1,869, or 75%, are still held. The note gives different counts for companies held five years or more in different sections, so we have not used those.
Most incentive plans were designed around an exit date. Morgan Lewis, writing in October 2026, makes the point plainly: delayed exits are now common enough that plans need to be designed for them.
A waterfall that goes to zero, with invented numbers
This is a simplified illustration, not anyone's structure. The sponsor's money goes in as $180 million of preferred instruments that accrue 10% a year, compounding. Management holds 12% of the ordinary equity that sits behind them. The business is worth $320 million to equity holders in year five, and it is still worth $320 million in year seven, because growth has stalled but nothing has broken.
| Exit year | Equity value | Sponsor preference | Left for ordinary equity | Management's 12% |
|---|---|---|---|---|
| Year 5 | $320M | $290M | $30M | $3.6M |
| Year 6 | $320M | $319M | $1M | $0.1M |
| Year 7 | $320M | $351M | $0 | $0 |
Nothing about the business changed. Two years of accrual took management's stake from $3.6 million to nothing. Real structures differ, and many have ratchets or other features, but this is the basic arithmetic your leaders can do on a spreadsheet.
The plan was built for a five-year exit. Your leaders know the date has passed before anyone tells them.
The risk lands on the seats that matter most. The leaders who are most marketable are the ones with the most options, and recruiters call them first. If they leave in year seven, they leave just as a buyer's diligence team arrives to assess the management team, which is the worst moment to have an interim name on the org chart nobody planned for.
Four doors
- Fix the plan. Latham & Watkins lists four reset options: cash or phantom equity bonuses, resetting existing hurdles, a new class of equity with achievable hurdles, and amending or waiving the sponsor's shareholder debt. Morgan Lewis adds retention and performance bonuses and limited liquidity before exit. Each has tax, valuation and consent consequences.
- Retain with cash. A retention bonus tied to staying through the sale is simpler than changing the equity, and it is visible to everyone, including the buyer. It buys time, but not belief.
- Bridge. If a key leader leaves, or should, a fractional executive can hold the seat through the sale process so the org chart is stable when diligence starts. See The Fractional Bridge for PE-Backed Companies.
- Search now. If the seat needs a different leader for the exit, run a confidential retained search, and design the new hire's equity around the exit date you actually believe, not the one in the original model.
Three questions for the first two weeks
- What is each of the top five leaders' equity worth today, from their side? Run the waterfall at a realistic value and at the exit date you believe. If you have not done it, assume they have.
- Which of those seats will a buyer examine most closely? Usually the CEO and CFO, and often whoever runs the growth story. Those are the seats where an unplanned exit hurts most.
- What exit date do you actually believe, and does the plan pay at that date? If the answer is no, the conversation about incentives is already happening, whether or not you are in it.
What this is not
It is not an argument for handing out more equity whenever an exit slips. Some leaders are not the right team for the next owner, and that is a separate question, covered in Seven Years In. It is not tax or legal advice: changing equity rights before an exit can trigger tax charges, and lenders and other shareholders may need to consent. And sometimes the right answer is to do nothing, if the exit really is close and the team knows it.
Write the process rule down. For each top-five seat, name the door, record why, and set a review date tied to the next exit milestone. Revisit it the next time the date moves.