Market Conditions and the Exit Rate of Private Equity Investments in an Emerging Economy

Abstract

Private Equity (PE) funds are active investors. Besides providing capital, they improve the governance, operational performance and innovation of the investee companies. However, potential misalignment between the fund manager and the company owner regarding exit timing is a limitation of the model. PE funds have a finite-life, and thus they have to liquidate investments after holding them for a certain period. They tend to time the market to exploit favorable market conditions and obtain higher selling prices, and consequently, PE funds may divest before accomplishing the value creation plan. In this article, we use the hazard model to investigate the magnitude of the impact of market conditions on the exit rate of PE deals in Brazil, a volatile emerging economy, and if it increases the chances of exiting investments with holding periods shorter than two years. We analyze a sample of 470 PE deals invested between 1994 and 2014, and we investigate four variables related to market conditions: the stock market priceearnings ratio, the number of IPOs, the Brazilian real (the Brazilian currency) appreciation against the US dollar and the Brazilian interest rate. Our results show that favorable market conditions more than double the exit rate and increase the probability of quick flips.

O potencial dos search funds

“…Em VC, a participação é sempre minoritária, visando conceder protagonismo aos fundadores. Os gestores dos fundos integram o conselho de administração e têm o poder de interferir na gestão da empresa caso seja necessário, mas os investidores não participam das decisões de investimento e desinvestimento nem do monitoramento das empresas investidas, para não correr o risco de descaracterizar a responsabilidade limitada 11 .…”

What Information Implied in the Equity Offering Mechanism with Market Timing Considerations?

“…The equity offering method, in general, can use two popular options: right issue and private placement. The choice of these two mechanisms has increased rapidly globally and has recently become the focus of study by many researchers Dahiya et al, 2017;Lewis and Tan, 2016;Lorenz, 2020;Minardi et al, 2019). Research selecting a share offering mechanism tries to answer whether the right issue mechanism or private placement implies information asymmetry.…”

“…Empirical evidence in several previous studies shows that the information costs related to public offerings are higher because there are more potential investors. Therefore, companies will choose a private placement mechanism with large investors compared to a public offering mechanism (Gomes and Phillips, 2012;Chen et al, 2017;Dahiya et al, 2017;Lim et al, 2021;Minardi et al, 2019).…”