Determinants of Private Equity Exit Strategies: An Empirical Study of the Nordic Private Equity Market

Abstract

This thesis seeks to uncover the determinants of private equity (PE) exit strategies in the Nordics by examining the three most common exit routes available to PE firms: secondary buyouts (SBOs), initial public offerings (IPOs) and trade sales. Based on data received by Argentum, we construct a unique sample containing PE firm and fund characteristics, portfolio company characteristics and market conditions for 525 Nordic buyouts between 2008–2021. We find evidence of PE funds capitalizing on “windows of opportunities” by exiting through IPOs in hot stock markets to cash in on their investments at presumably higher valuations, which is consistent with previous research. Second, we find evidence that the purchasing buyout fund participating in an SBO singles out companies with better operating performance who exceed other companies in coping with higher levels of debt. Third, the probability of exiting through an SBO relative to an IPO tends to increase as the fund approaches maturity, highlighting the attractiveness of an SBO: it often achieves a high price, with low transaction risk and the shortest delay in receiving the proceeds. There is no evidence suggesting that the increasing amount of committed, but unallocated, capital leads to a relative increase in SBOs or that PE funds closer to maturity tend to exit through SBOs when investments are made late in the fund’s life cycle. These two findings are particularly intriguing as it contradicts the claims made by PE critics of asset flipping and SBOs being “pass-the-parcel” deals for managers willing to exploit PE funds’ fee structures. Furthermore, older companies with lower revenues and better asset utilization have a significantly higher probability of being exited through a trade sale, possibly illustrating thirdparty buyers’ preferences in pursuing more mature companies relative to the preferences of PE funds. In line with several studies, we also find that IPOs appear to be the preferred exit choice for PE funds exiting larger portfolio companies. Last, we find no evidence regarding the impact of favorable credit markets or higher information asymmetry on the choice of exit channel.