Fare Thee Well? An Analysis of Buyout Funds’ Exit Strategies

Abstract

This paper analyzes exit strategies of buyout funds in portfolio companies following initial public offerings (IPOs). We use a data set of 222 buyout‐backed IPOs in the United States from 1999 to 2008, including hand‐collected data about each exit process, to draw a detailed roadmap of buyout investors’ divestment processes. Using this data, we document the timing and aggressiveness of the exit strategies, and analyze to which degree a multitude of possible determinants influence the choice of a given exit strategy. Our results indicate that buyout funds remain invested in their portfolio companies for a substantial period of time after the IPO, and that the choice of a given exit strategy depends not only upon the characteristics of each respective portfolio company, but also on the financial success of the deal from the perspective of the buyout investor.

The value of ongoing venture capital investment to newly listed firms

“…The director that represents the VC investor sits on the board for just under 3 years. This is consistent with US evidence for buyout funds in Fürth and Rauch (). The VC investor owns on average close to 10 percent of the firm at the time of resignation from the board and the majority of the resignations are for directors that represent VC funds (62 percent).…”

“…For sell transactions before March 2002, the average time held after IPO is 2.5 years and it is 1.8 years after March 2002. This is consistent with US results for buyout firms where Fürth and Rauch () show that buyout funds stay invested in their portfolio companies for an average of 2.7 years after the IPO (where the lockup periods for buyout funds is 2 years).…”

“…First sales account for 35 percent of sale transactions and have a larger impact (a 2‐day return of −1.20 vs. −0.21 percent). The negative market reaction to sale transactions is consistent with Fürth and Rauch () for US buyout funds and similar to Gompers and Lerner () for VC share distributions.…”

“…Previous studies show that PE and VC investors remain actively involved in the post‐IPO period by means of holding seats on the company board of directors (Barry et al ., ; Fürth and Rauch, ). Board representation allows the VC investors to have direct influence on decision making.…”

Should I stay, or should I go? – How fund dynamics influence venture capital exit decisions

“…The authors investigate the influence of market conditions and portfolio company‐related factors on the exit extent and find for the 66 IPOs in their sample that the likelihood of full exits is increased during hot market periods. The influence of the market conditions on the holding period is confirmed by a recent study on IPO exit behavior of U.S. buyout funds by considering the sales of shares and board exits (Fürth & Rauch, 2012). Buyout funds have an average holding period of 2.76 years after the IPO and exit periods are significantly shorter during bull markets.…”