Abstract
This paper analyzes whether secondary buyouts of private equity (PE) investors in general create value and therefore are a suitable alternative to exit strategies like trade sales and IPOs. Theoretically, two conflicting approaches might explain the use of secondary buyouts as an exit channel of private equity investors: the capital recycling effects and different potential sources of value creation. We present empirical tests of these approaches. The profitability of secondary buyouts is assessed by a comparison of exit multiples realized with secondary buyouts and trade sales. The results are not unequivocal, but overall we interpret our findings in a way that awards secondary buyouts a profitability that is not significantly different from trade sales. Therefore, we argue that secondary buyouts have the potential for adding value that arise from different sources like the reduction of agency costs or the functions of the financial investor. Secondary buyouts should thus not be seen as a second best alternative for recycling the PE investors’ capital in situations where alternative—and supposedly more attractive—exit channels are unavailable.
Highlights
The profitability of a private equity (PE) investments critically depends on the realization of a successful exit strategy to terminate an investment [1,2] Throughout the 1990s and until the year 2000, PE investments were primarily exited through initial public offerings (IPOs) [3]
The central subject of examination in this paper has been the question whether secondary buyouts in general create value and are a suitable alternative to exit strategies like trade sales and MBOs
It was assumed that secondary buyouts would be potentially value adding exit channels, if their profitability would be comparable to that of trade sales
Summary
The profitability of a private equity (PE) investments critically depends on the realization of a successful exit strategy to terminate an investment [1,2] Throughout the 1990s and until the year 2000, PE investments were primarily exited through initial public offerings (IPOs) [3]. PE investments can be defined as minority participations in the equity of companies that are not publicly listed at a stock market [11] These kinds of investments have “a strict finite life with an expected duration of a few years [11]1 and the nature of the investment usually requires a high degree of direct involvement by the investor.” [12,13] The overriding importance of an efficient exit strategy thereby results from the fact that most of the PE investor’s return arises in the form of capital gains at the time of the exit, and not through cash flows during the investment period [8,9].
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
