Exit Strategies for Private Equity: US and European Evidence

Last week we outlined exit strategies for private equity investments.  One strategy that we didn't feature is a 'write-off'.  Obviously, write-offs can represent a failed investment and are (generally) undesirable. However, the ability to cut losses early is a healthy trait in any investment strategy.  The article below highlights exit strategies for US and European buyouts over the 1990-2005 period, revealing many interesting aspects of the exit process.  The importance of market sentiment is also noted, making it imperative to ascertain current and projected market conditions in any analysis.

 Exit Strategies of Buyout Investments – An Empirical Analysis 

Daniel Schmidt Sascha Steffen Franziska Szabó 

June 1, 2009 

(Abstract) 

"We analyze the three main exit routes for exiting buyout investments, initial public offerings (IPO), sales and write-offs on, using a unique data set for US and European buyout transactions for the 1990 to 2005 period. We examine the determinants influencing the choice of an exit channel employing a multinomial logit model. The results strongly support the view that private equity investors write-off investments that turn out to be non-performing early, showing their ability to filter out good from bad investments. We further find evidence that exits of buyout investments tend to be driven by market sentiment. We further analyze as to how the internal rate of return (IRR) influences which exit route is chosen. We find supporting results that only the most profitable ventures are taken public. Our results have implications for exiting buyout investments during the current financial crisis. "

The complete paper can be downloaded here.

All the best,

Ralph

PS We are approaching the next offering of our Acquisition Finance Course in Amsterdam and that also means approaching the deadline to sign up.