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The Journal of Alternative Investments

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Exit Strategies of Buyout Investments: An Empirical Analysis

Daniel M Schmidt, Sascha Steffen and Franziska Szabó
The Journal of Alternative Investments Spring 2010, 12 (4) 58-84; DOI: https://doi.org/10.3905/JAI.2010.12.4.058
Daniel M Schmidt
is a managing director of CEPRES Center of Private Equity Research in Munich, Germany.
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  • For correspondence: daniel.schmidt@cepres.de
Sascha Steffen
is an assistant professor at the department of banking and finance, University of Mannheim in Mannheim, Germany.
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  • For correspondence: steffen@bank.bwl.uni-mannheim.de
Franziska Szabó
is an associate at Metzler Corporate Finance in Frankfurt, Germany.
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  • For correspondence: franziskaszabo@gmx.de
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Abstract

Although buyout investments represent a considerable proportion of private equity volume, so far little research has been done on the exit strategies of buyout investments. This article takes a step in this direction by investigating buyouts in more detail focusing particularly on the divestment process. Since exiting enables the realization of returns and is thus the most important factor for private equity investors, it is important to understand the motivation behind and the determinants influencing this decision. The authors analyze three main exit routes for exiting buyout investments: initial public offerings (IPO), sales and write-offs, using a unique data set for U.S. and European buyout transactions. They examine the determinants influencing the choice of an exit channel by 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 bad investments. They also analyze how the internal rate of return (IRR) influences which exit route is chosen. The results show that only the most profitable ventures are taken public. The results have implications for exiting buyout investments during financial crises.

TOPICS: Private equity, developed, financial crises and financial market history, performance measurement

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The Journal of Alternative Investments: 12 (4)
The Journal of Alternative Investments
Vol. 12, Issue 4
Spring 2010
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Exit Strategies of Buyout Investments: An Empirical Analysis
Daniel M Schmidt, Sascha Steffen, Franziska Szabó
The Journal of Alternative Investments Mar 2010, 12 (4) 58-84; DOI: 10.3905/JAI.2010.12.4.058

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Exit Strategies of Buyout Investments: An Empirical Analysis
Daniel M Schmidt, Sascha Steffen, Franziska Szabó
The Journal of Alternative Investments Mar 2010, 12 (4) 58-84; DOI: 10.3905/JAI.2010.12.4.058
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  • Article
    • Abstract
    • THE IMPORTANCE OF EXIT STRATEGIES
    • LITERATURE REVIEW AND HYPOTHESES
    • DATA
    • METHODOLOGY AND RESULTS
    • DISCUSSION
    • CONCLUSION
    • ENDNOTES
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