PRIVATE EQUITY EXIT STRATEGIES

Transcription

1 COLEGIO UNIVERSITARIO DE ESTUDIOS FINANCIEROS GRADO EN ADE Trabajo Fin de GRADO PRIVATE EQUITY EXIT STRATEGIES IPOs, Trade Sales and Secondary Buyouts Autor: Pérez Navarro, Pedro Tutor: Chiarella, Carlo Madrid, junio de 2018

2 INDEX OF CONTENTS 1. INTRODUCTION OVERVIEW CONTEXT CONCEPTUAL FRAMEWORK EXIT PLANNING Control and Liquidity Management Incentives EXIT STRATEGIES Initial Public Offering Advantages of an IPO Disadvantages of an IPO Secondary Buyout Trade Sale EMPIRICAL ANALYSIS SAMPLE DESCRIPTION Portfolio and Exits Overview Characteristics of the Sample ANALYSIS Valuation Analysis Length of Transaction Analysis T-test Analysis IPO vs. non-ipo Trade Sale vs. Secondary Buyout Regression Analysis IPO Regression Trade Sale Regression Secondary Buyout Regression CONCLUSION BIBLIOGRAPHY

3 INDEX OF FIGURES Graph 1 Value Creation Strategy (%) Graph 2 All Private Equity Firms Graph 3 Global Buyout Investment Value and Deal Count Graph 4 European IPO activity since 2008 Graph 5 Volatility tracked against European IPO values Graph 6 Global M&A volumes Graph 7 Distribution of Exits Table 1 Portfolio and Exits Overview Table 2 Exits Overview (%) Table 3 Exit Multiples Table 4 Highest Exit Multiples Table 5 Length of Transaction Table 6 IPO vs. non-ipo Table 7 Trade Sale vs. Secondary Buyout Table 8 IPO Regression Table 9 Trade Sale Regression Table 10 Secondary Buyout Regression 3

4 1. INTRODUCTION 1.1. OVERVIEW This report is based on the different exit strategies that the Private Equity firms have. The main business of the Private Equity firms is to purchase private companies and then sell them after a period of time. It is usually a buyout, it means that the private equity firm purchases most of the equity so they can control the target. The method of valuation and acquisition that a private equity firm use is the Leveraged Buyout (LBO). By this method the private equity firm is purchasing the target mostly with debt and the remaining part with equity. The debt is repaid with the cash flows generated by the target company during the period of time that is hold. Thus, the PE firms have an average of 20% to 25% of Internal Rate of Return. An example to understand how the LBO works is a basic mortgage, a house worth 500,000 is purchased in 2010 with 400k of debt and 100k of equity. After 8 years, in 2018 it is still worth 500,000 and the debt has been repaid with the cash flows generated by the house because it was rented. It means that the beginning equity was 100k and the ending equity is 500. Therefore, the Internal Rate of Return (IRR) is 22.3%. This is called a Deleveraging value creation, which the Private Equity firm creates value by reducing the amount of the initial debt with the cash flows generated by the portfolio company. The second lever of value creation is based on Operational Improvements such as changing the management team or through other alternatives such as reducing costs. In this way if the entry multiple is 10x EBITDA and with the operational improvements the EBITDA has increased a 10%, even if the PE sell the firm with an exit multiple of 10x the Enterprise Value is going to be higher because the performance of the target is better with the operational improvements. 4

5 The third lever of value creation is Multiple Expansion. It consists on buying the company with a low entry multiple and then sell the company at a higher exit multiple in aid of market conditions s 1990s 2000s 2012 Operational Improvement Multiple Expansion Deleveraging Graph 1 Value Creation Strategy (%) Source: Own elaboration with data from Boston Consulting Group As it can be observed in the Graph 1, Operational Improvement strategy has increased and on the contrary, Deleveraging has decreased. Therefore, Private Equity firms have to improve as much as possible the companies in which they invest. In general, the IRR obtained by a Private Equity firm on a deal is the combination of the different levers of value creation CONTEXT This analysis is focused just on the different exit strategies. There are numerous of exit strategies but the three main exit strategies are: Initial Public Offering (IPO) Trade Sale (TS) Secondary Buyout (SB) 5

6 An Initial Public Offering is the first time that a company sell it shares to the public, it is also called going public. A Trade Sale is called when a company is purchased by a strategic acquirer, the main purpose is to create synergies with the acquisition because the buyer is a company from the same sector or industry. A Secondary Buyout is to sell the company to a Private Equity firm. There are not synergies in this process because the buyer is a financial sponsor. These three exit strategies will be analyzed considering the following variables (independent variables): Valuation Deal Size Sell Stake Months Held Length of transaction Therefore, in the analysis is observed how the independent variables (Valuation, Deal Size, Sell Stake, Months Held and Length of Transaction) affect the dependent variables (IPO, TS or SBO). The purpose of this analysis is to be able to understand which of the three main exit strategies is the appropriate considering the independent variables. As it is reflected on the graph below, the number of PE buyouts and PE firms are increasing sharply, consequently there are more transactions that need to be advised by Investment Banks. 6

7 Graph 2 All Private Equity Firms Source: Bain & Company Global Private Equity Report 2018 Graph 3 Global Buyout Investment Value and Deal Count Source: Bain & Company Global Private Equity Report 2018 The main function of the Investment Banks is to advise transactions related to Corporate Finance, Mergers & Acquisitions (M&A), Equity Capital Markets (ECM), Debt Capital Markets (DCM). Usually, the Investment Banks are advisors of the Private Equity firms during the exit process. This analysis is done from the point of view of an Investment Banker to understand which of the exits must be chosen considering the interest and the features of the target firm. 7

8 After this introduction, the different exit strategies (IPO, Trade Sale and Secondary Buyout) will be theoretically explained in terms of main characteristics, advantages and disadvantages. Then, the sample used for this analysis will be presented. The first independent variable that it will be analyzed is valuation. It is the most important variable because the kind of exit strategy may affect the valuation. The deal size, months held and stake sold will be analyzed with a regression to see the relation between each of the exits whit these variables. If the analysis of the sample matches the theory that will be mentioned, it would mean that the theory is efficient and therefore a pattern could be created to decide the future exits of the Private Equity portfolio. 2. CONCEPTUAL FRAMEWORK 2.1. EXIT PLANNING In the buyout stage, the Private Equity firm must have a plan for the company that is being acquired in terms of time and strategy. Therefore, even before the target company is being acquired the sponsor must have an exit plan Control and Liquidity The Private Equity firm must have enough control and liquidity over the target company. Usually, the buyout involves some changes in the structure of the company and the statutes. In other words, the PE firm must protect the investment in the company with: Board control: Although daily operations and management of the target company are not controlled by the PE firm, they must have a seat on the board to control with enough power the main issues of the company. 8

9 Registration rights: The PE firm should be clear to have registration rights if the target company engages in a public offering. Redemption rights: If there are some problems, the PE firm should have clear that it is possible to cash out the investment in the target company through the repurchase of the equity by the target company. Drag-along rights: It is a legal practice that allows PE firm (the main shareholder) force the minority shareholders to sell their shares of the target company with the same terms and conditions Tag-along rights: The difference with the drag-along rights is that the minority shareholders are not forced to sell their shares, but they have the rights to sell them with the same terms and conditions Management Incentives The Private Equity firm does not manage the operations of the target company but they should be coordinated with the management team of the target company because there must be a common goal between both of them. During the investment stage, the PE firm must disclose the exit plan to the management team because it is very important to convince the management team to support the exit transaction. The best way is to develop and implement an incentive program for the management team. There are some types of exits in which the management team of the target company is replaced by current management team of the acquirer, usually when it is a trade sale. Therefore, the management team will support the transaction if they have a very good incentives plan. There are different types of incentives programs, such as equity incentive plans, increase the salary or bonus for achievements of objectives. 9

10 2.2. EXIT STRATEGIES There are several exit strategies, but in this analysis only the most important and usually used by the private equity firms are going to be covered. Among the exit strategies that are not very used are: Selling shares after the Initial Public Offering using the registered secondary offerings and the Rule 144: Selling Restricted and Control Securities (U.S. Securities and Exchange Commission, 2013) Dividend recapitalizations, consists in paying the dividend with debt raised just for the dividend. Redemptions and Tag-along rights previously explained. Now the main exit strategies will be analyzed: Initial Public Offering It is the first time that the shares of the company are sold to the public. First, those shares are sold on the primary market. Usually, most of the shares are sold to institutional investors but there are some cases such as the IPO of Facebook, Inc. that most of the shares were sold to retail investors because of their values. Then, the company starts trading on the secondary market. The price is established by supply and demand of the shares by the public, unlike the primary market, in which the price of the IPO is established by the company with the help of the Investment Bank as a financial advisor and underwriter. The IPO exit is completely determined by the situation of the market. When there is a bull market it is observed that the number of IPOs increase and even more important, in terms of value. On the other hand, if the market is bearish the number of the IPOs will be lower than when is bullish in terms of number of total of IPOs completed and value. Another indicator of a strong market of IPOs is the volatility. A low volatility in European indices will benefit the market for IPOs. 10

11 Graph 4 European IPO activity since 2008 Source: IPO Watch Europe 2017, PricewaterhouseCoopers (PwC) Graph 5 Volatility tracked against European IPO values Source: IPO Watch Europe 2017, PricewaterhouseCoopers (PwC) As shown in the graph number 4 it can be observed that the number of IPOs and their value are related to the situation of the economy and the ambition of the investors. As shown in the graph number 5, there is a negative relation between the money raised and the volatility. As volatility decreases, the money raised increases. The 11

12 trend of the last months is that volatility decreases, therefore this leads to a possible increase in money raised Advantages of an IPO exit Higher Valuation: IPOs exit valuation is empirically higher than other types of exit. Although IPOs exit does not give rise to a full exit, the remain stake of the PE firm in the portfolio company could be sold after the IPO. It is an advantage because once the company is public is easy to complete a valuation of the company because it practically depends on the market. It is also a lower cost than the valuation of a private company. Increased liquidity: Because IPOs exit are partial exits because it is not possible to sell the full company, IPOs are more liquid than other partial exits. It is easy for the private equity firm to sell the remain shares after the IPO because there is a market for those securities. Management Support: Is very important to have the support of the management team during the IPO. In this type of exit is more likely to have the management support because the management team knows that there is high probability of staying in the company after the IPO, unlike strategic acquisitions, which is common to replace the management team after the acquisition Disadvantages of an IPO exit Lack of complete exit: Unlike other exits, an IPO is a partial exit. Therefore, if the PE firm wants to sell the entire stake it will not be possible once. First, the PE firm will exit a part of the portfolio and then sell the remain shares in the secondary market. A concern for the PE firm is the reaction of the market. If the market does not react positively after the IPO, the value of the shares will be lower than the exit and therefore the PE firm will get less funds of the exit. Timing: The entire IPO process is very slow compared to the other exits. According to a report of Deloitte, the IPO process typically takes six months. 12

13 Costs: IPOs are very expensive because there are many people involved. The main costs of an IPO are the underwriter s fees, legal fees, external auditor fees, financial advisor fees, document printing costs, registration costs and the fees paid to the exchange market for listing. Reporting Obligations: Once a company is listed, it is mandatory to report documents periodically for the market regulators. This will be very costly for the company and a disadvantage because the company is completely transparent for the competitors Secondary Buyout A secondary buyout involves another sponsor to buy the portfolio company. The main advantages of this type of exit are the stake of the exit, the control and the timing. First of all, the PE firm achieves a complete exit because they can sell the total number of shares of the company, so they complete the exit and end the investment. The PE firm has the control of the sale process, unlike the IPO exit because of the regulatory issues. Finally, the timing is an advantage because once both parties agree with the terms, they can close the deal with a short regulatory process. There are some disadvantages in this type of exit. The first one and most important is that the financial buyers do not pay as much as strategic buyers. It is because they are not going to obtain synergies with the new company so they will not pay a premium for the company. Another disadvantage of the secondary buyout exit is the fact that, as it is explained before, the financial sponsors buy the companies with a large percentage of debt. In the case that the financial buyer does not get the funding, the transaction will stop Trade Sale The advantages of the strategic buyers are not far from the advantages of the secondary buyout exit. The main difference is the fact of the synergies. As it is a disadvantage for the secondary buyout exit, the synergies that will be created due to the integration of the company portfolio with the strategic buyer will make 13

14 the PE firm earn more money with the exit because of the premium paid by the strategic buyer. The other advantages are almost equal. The disadvantages of this type of exit are very important because they are completely decisive for the completion of the deal. The regulatory aspects chiefly affect this exit because of anti-trust issues. The completion of the deal may be pushed back or withdrawn owing to antitrust law. These last years, there have been many cases of transactions pushed back due to anti-trust issues and market concentration. A couple of examples of withdraw deals are the $35 Billion energy industry deal between Baker Hughes and Halliburton, and the $6.3 Billion of selling paper clips to business industry deal between Staples and Office Depot. M&A Global Outlook Graph 6 Global M&A volumes Source: JPMorgan 2018 Global M&A Outlook report The graphic 5 is to show the volumes and trends of the M&A market in which secondary buyouts and trade sales would be included. With the graphics 4, 5 and 6 it is possible to compare the volumes of the IPO market and M&A market. The 14

15 takeaways from these graphs is that the improvement in market conditions has led to an increase in the number of IPOs in recent years although some companies have postponed the IPO from 2016 to As a forecast, it may be possible that some companies are still waiting for the best moment to go public, which would mean that next year would be even better for the IPO market. On the other hand, the M&A market was stronger in 2016 than 2017 due to the decline of the number of megadeals, although the M&A market remains strong comparing the last years. It is very important to understand what are the variables and how they affect the exit strategy considering the market situation of both M&A and IPO markets. These issues demand further empirical analysis. 3. EMPIRICAL ANALYSIS 3.1. SAMPLE DESCRIPTION Now an analysis will be carried out to verify that the variables previously seen affect the exit decision. For this purpose, a sample based on the exits of the largest Private Equity firms will be used: The Blackstone Group The Carlyle Group Apollo Global Management Kohlberg Kravis Roberts (KKR & Co.) CVC Capital Partners The Blackstone Group It is a Private Equity firm founded in 1985 based in New York, United States. It is the largest Private Equity firms in the world with a total of USD 434.1Bn Assets Under Management (AUM). The key areas of expertise of Blackstone are Private Equity, Real Estate, Hedge Fund Solutions and Credit. Stephen A. Schwarzman is the current Chairman, CEO and Co-Founder. 15

16 The Carlyle Group It is a Private Equity firm founded in 1987 based in Washington D.C, United States. It is one of the largest Private Equity firms in the world with a total of USD 195Bn Assets Under Management (AUM). They operate the same area of business as Blackstone, Private Equity, Real Estate, Global Credit and Investment Solutions. Daniel A. D Aniello, William E. Conway and David Rubenstein are Co-Founders. Apollo Global Management It is a Private Equity firm founded in 1990 based in New York, United States. It is the second largest Private Equity firm in the United States with a total of USD 245Bn Assets Under Management (AUM). The business areas are Private Equity, Real Estate and Credit. Leon Black is the Chairman and CEO of the firm. Kohlberg Kravis Roberts (KKR & Co.) It is a Private Equity firm founded in 1976 based in New York, United States. It is one of the largest Private Equity firms in the world (around same size as Carlyle) with a total of USD 149Bn Assets Under Management (AUM). It is an investment firm of Private Equity, Real Estate Credit, Energy and Infrastructure. Henry R. Kravis and George R. Roberts are Co-Chairman and Co-CEO CVC Capital Partners It is a Private Equity firm founded in 1981 based in Luxemburg. The firm has a total of USD 52Bn Assets Under Management (AUM). It is not as large as the other PE firms of the sample but they have a lot of investments in Europe. The key products are Private Equity, Venture Capital and Credit Asset Management Portfolio and Exits Overview PE firm Current Portfolio Secondary Buyouts Trade Sale IPO Blackstone Carlyle Apollo KKR & Co CVC Table 1 Portfolio and Exits Overview Source: Own elaboration based on Mergermarket data 16

17 PE firm Secondary Buyouts Trade Sale IPO Blackstone 15% 70% 15% Carlyle 23% 64% 12% Apollo 23% 54% 23% KKR & Co. 14% 64% 22% CVC 31% 58% 11% Average 21% 62% 17% Table 2 Exits Overview (%) Source: Own elaboration based on Mergermarket data The information above is not the sample of the analysis. It is data to show the overview of the exits of the Private Equity firms during all the time since its foundation and their current portfolio. In the graph 6 it is reflected the proportion of each type of exit. After the graph, the characteristics of the sample will be explained. CVC KKR & Co Apollo Carlyle Blackstone IPO Trade Sale Secondary Buyouts Graph 7 Distribution of Exits Source: Own elaboration based on Mergermarket data Characteristics of the Sample The sample will consist on the exits of the Private Equity firms mentioned before, but with these characteristics: Exits of the last 10 years (01/01/2008 until 15/03/2018) Exit types (dependent variables): 17

18 o IPO o Secondary Buyout o Trade Sale Industry: All Sectors (Agriculture, Automotive, Construction, Utilities ) Geography: All Europe (Austria, Belgium, Bulgaria, Germany ) Independent Variables: o Valuation o Length of transaction (date from the announcement until the completion) o Deal Size o Months Held (of the target company in the PE portfolio) o Sell Stake Currency: Euros Total number of deals: 90 Total Value: EUR 107,555m All information has been downloaded from Mergermarket Analysis The analysis consists of observing the relation between the dependent variables (IPO, Trade Sale and Secondary Buyout) and the independent variables (Valuation, Length of Transaction, Deal Size, Sell Stake and Months Held). These variables have been chosen because they are the main characteristics of a deal or transaction. In addition, these variables are easy to quantify to perform an analysis, unlike some variables such as the management support. Based on the conceptual framework, these variables will affect the decision to go for one type of exit strategy or another. It is expected that the IPO exit will have the higher valuation but also will be the slowest transaction length. The deal size depends if the exit is a full exit or partial exit. IPOs are expected to have small deal size because IPOs exits are partial exit. Thus, both deal size and sell stake are sometimes related because usually if the sell stake is small, the deal size would also be small. The months held variable is expected to affect the exit strategy depending on different situations. If a Private Equity firm has had a 18

19 company in its portfolio for a long time and needs liquidity, the PE firm would choose the fastest exit, that it is expected to be the secondary buyout exit or the trade sale exit if there are not delays on regulatory aspects. Another situation for the months held variable would be the situation of the market for an IPO, because as it is mentioned on the conceptual framework, some companies wait for the best moment to go public, so they hold the company on their portfolio for a longer time. First, an analysis of valuation will be done to compare the multiples of each exit. It will be possible to check if the theory mentioned before matches the result of the sample. Then, an analysis of the length of transaction will be done for the same purpose as the analysis of valuation. Finally, a regression analysis will be done to observe the relation between each exit and the rest of the independent variables (Deal Size, Sell Stake and Months Held). Therefore, the analysis is being organized as follows: Valuation Analysis comparing the multiples of each exit Length of Transaction Analysis T-test of means across subsamples: o IPO vs. non-ipo o Secondary Buyout vs. Trade Sale Regression Analysis to check the relation between: o Each dependent variable: IPO Secondary Buyout Trade Sale o Independent variables: Deal Size Months Held Sell Stake Valuation Analysis There are several valuation methods to calculate the Enterprise Value. The most important are: 19

20 Discounted Cash Flow (DCF), which consist of discounting the future cash flows of the firm through the Weighted Average Cost of Capital (WACC) and considering the Terminal Value of the company. The WACC is the cost of capital of the firm. It is weighting between the cost of Debt and the cost of Equity. This is the DCF formula: EV = Cash Flow 1 (1 + WACC) Cash Flow 2 Cash Flow n (1 + WACC) 4 (1 + WACC) 7 Comparable Company Multiples, which consist of using the multiples of a listed company to apply for the metrics (Revenues, EBIT, EBITDA ) of the company that is being valuated. Precedent Transactions Multiples, consist of using the multiples of precedent transactions of the same sector or industry and apply them to the company. But what is a multiple? It is a number that multiplying by a metric such as (Revenues, EBITDA, EBIT ) gives you the Enterprise Value (EV) of the company. EV EBITDA = 10x For example, if the EV/EBITDA multiple of a company is 10x, that means that if the EBITDA of the company is EUR 100 million, the Enterprise Vale of the company will be EUR 1,000 million For this analysis, the average and the median of the main transaction multiples have been obtained. The following table shows the results obtained. Note that the Exit Multiple Average (adjusted) is based on removing the top and bottom 2.5% of the original data results. 20

21 Secondary Buyout Revenue EBITDA EBIT Earnings Exit Multiple - Average 3.0x 14.1x 35.0x 481.3x Exit Multiple - Median 2.2x 10.0x 15.2x 13.3x Exit Multiple - Average (adj) 2.7x 11.0x 23.1x 13.3x Trade Sales Revenue EBITDA EBIT Earnings Exit Multiple - Average 6.7x 64.9x 27.8x 118.5x Exit Multiple - Median 2.4x 11.6x 19.7x 23.8x Exit Multiple - Average (adj) 3.0x 13.0x 24.4x 35.3x IPO Revenue EBITDA EBIT Earnings Exit Multiple - Average 3.9x 17.4x 40.3x 39.0x Exit Multiple - Median 3.2x 15.4x 26.2x 23.3x Exit Multiple - Average (adj) 3.5x 15.8x 29.3x 31.4x Table 3 Exit Multiples Source: Own elaboration based on Mergermarket data To make it easier to analyze, the following tables show (with a P ) which are the highest multiples for each metric: Exit Multiple - Average Revenue EBITDA EBIT Earnings Secondary Buyout P Trade Sales P P IPO P Exit Multiple - Median Revenue EBITDA EBIT Earnings Secondary Buyout Trade Sales P IPO P P P Exit Multiple - Average (adj) Revenue EBITDA EBIT Earnings Secondary Buyout Trade Sales P IPO P P P Table 4 Highest Exit Multiples Source: Own elaboration based on Mergermarket data The results can be interpreted in a variety of ways considering the average, median or average adjusted of the exit multiple. 21

22 Considering the average, the results obtained show that Trade Sales has the highest valuation using the EV/Revenues and EV/EBITDA. If the EV/EBIT is used, the highest valuation is the Initial Public Offering. Finally, using the Earnings (it is not widely used), the highest valuation is for the Secondary Buyout. Considering the median, the results obtained show that the IPO has the highest valuation in every metric except Earnings. As it is mentioned, it is not a metric very used. The results are equal for the adjusted average, which removes the top and bottom 2.5% of the original data to eliminate the standard deviation that affect the average. In conclusion, it is observed that there is relation between the first independent variable analyzed (valuation) and the dependent variables (IPO, TS and SB). This first analysis match with the theory explained before. Therefore, the first analysis has good results. It is very important to highlight that differences in valuations are the first indication that the exit strategy matters. Although, this is a generalist valuation analysis, so there are no differences in multiples across sectors or industries and the possibility that different exit strategies are more or less frequent in different sectors Length of Transaction Analysis The objective of this analysis is to see how many days there are from the Announced date to the Completed date. Due to regulation, it is fully proven that the IPO exit is the slowest because the process is around 6 months. Also, there is not available information on Mergermarket of the length of an IPO process. But the length of transaction analysis is very useful to compare the duration of the Trade Sale Exit and the Secondary Buyout Exit. The results are shown below. Length of Transaction IPO Trade Sales Secondary Buyout Average (days) n. a Median (days) n. a Table 5 Length of Transaction Source: Own elaboration based on Mergermarket data 22

23 The length of transaction analysis demonstrates that the trade sale process is longer than the secondary buyout process, owing largely to the regulatory aspects related to anti-trust issues. The length of transaction is another indication that the exit strategy matters T-test Analysis The T-test Analysis is done to compare the difference between the mean of the independent variables across the subsamples. Firstly, a t-test of means across IPO vs. non-ipo will be done and then a t-test of means across Secondary Buyout vs. Trade Sale IPO vs. non-ipo Here are the results of the t-test analysis done to compare the mean of each independent variable (Deal Size, Months Held and Sell Stake) when there is an IPO exit and when there is not an IPO exit: Deal Size IPO non- IPO Months Held IPO non- IPO Mean 758, ,4 Mean 72,7 60,9 t Stat -1,43 t Stat 0,97 Sell Stake IPO non- IPO Mean 14,4 64,2 t Stat -4,90 Table 6 IPO vs. non-ipo Source: Own elaboration based on Mergermarket data The results of the t-test analysis match with the results of the regression analysis that will be shown later. First of all, it can be seen that in the deal size variable, the mean of the IPO exit is lower than the mean of the non-ipo exits. The reason is that the IPO exit is partial, so the deal size is usually low because the stake sold is small. The non-ipo exits are usually full exits;; therefore, the deal size is bigger than the IPO exits because the stake sold usually is the total of the shares of the company. In the sell stake variable, the mean of the IPO exit is much lower than in the non-ipo exits. The reason is the same as the previously mentioned, the IPO exits are partial exits so the stake sold is usually very low. In this conclusion, it can be seen that there is a relation between the deal size and the stake sold. 23

24 In the months held variable, it can be seen that mean of the IPO exit is higher than the mean of the non-ipo exits. One of the reasons could be that Private Equity firms wait until the market is in good conditions to sell their shares into the public. Another reason could be that the IPO process is very slow, so the Private Equity firms have to held the company on their portfolio for a longer time Trade Sale vs. Secondary Buyout Here are the results of the t-test analysis to compare the mean of each independent variable when there is Trade Sale exit or a Secondary Buyout exit: Deal Size TS SBO Months Held TS SBO Mean 2.001,3 736,1 Mean 60,1 62,8 t Stat 1,9 t Stat -0,2 Sell Stake TS SBO Mean 65,6 65,5 t Stat 0,0 Table 7 Trade Sale vs. Secondary Buyout Source: Own elaboration based on Mergermarket data As is shown in the tables above, except from deal size, there is less difference between the means of the independent variables comparing Trade Sale exit vs. Secondary Buyout exit than the IPO exit vs. non-ipo exit. The first impression of this analysis is that the deal size matters in the type of exit between the Trade Sale Exit and the Secondary Buyout exit. The deal size is usually bigger in the Trade Sale exit than the Secondary Buyout exit. On the other hand, there is not a lot of difference in the months held and sell stake means between each type of exit, Trade Sale and Secondary Buyout Regression Analysis The regression analysis is based on the remaining independent variables. It is done to see the relation between each exit and the deal size, months held and Sell Stake. 24

25 Initial Public Offering Regression Here are the results of the regression done to see the relation between the IPO exit and the independent variables. Coefficients t Stat Coefficients t Stat Deal Size -7.4E Deal Size - P Months Held Months Held + O Sell Stake Sell Stake - P Table 8 IPO Regression Source: Own elaboration based on Mergermarket data There is a negative relation between the IPO exit and the Deal Size. It is because the IPOs are partial exits, therefore the deal size is the stake sold of the total Enterprise Value. That s why there is a negative relation. If the IPOs were full exits, it would be a positive relation between the IPO and the deal size. For example, if there is an IPO of a company with an Enterprise Value of EUR 1,000M but the stake (free float) is just a 30% the deal size will be EUR 300M. As it is shown in the table, the t-stat is -2.3, that means that the coefficient is different from 0, so it is statistically significant at the 5% level. There is a positive relation between the IPO exit and Months Held. Unfortunately, the t-stat is less than 1.7, and that means that coefficient is not different from 0, so it is not statistically significant. If the t-stat were statistically significant the coefficient would mean that the more months hold, more probability to do an IPO exit. But it is not statistically significant, therefore it can not be corroborated. There is a negative relation between the IPO exit and the stake sold. It is because, as it is mentioned before, the IPO exit is a partial exit so usually the stake is small. The t-stat is less than -1.7, that means that the coefficient is different from 0, so it is statistically significant at the 1% level. If a Private Equity wants to divide in two times the sale of a portfolio company, the IPO would be a good exit to sale the remain shares after the IPO. 25

26 Trade Sale Regression Here are the results of the regression done to see the relation between the trade sale exit and the independent variables. Coefficients t Stat Coefficients t Stat Deal Size Deal Size + P Months Held Months Held - O Sell stake Sell Stake + O Table 9 TS Regression Source: Own elaboration based on Mergermarket data There is a positive relation between the trade sale exit and the deal size because the coefficient is positive. It means that the larger the deal size, a strategic sale will be better. The t-stat is higher than 1.7, which means that the coefficient is different from 0, so it is statistically significant at the 5% level. Usually, the largest companies are acquired by its competitors because of the amount of assets that they have to create synergies. The difference with a secondary buyout is that the size of the company is not an essential factor for the sponsor who acquires the company. There is a negative relation between the trade sale exit and the independent variable of months held. It may be because when the bidders are competitors of the portfolio company and are in time pressure to acquire the company before other competitors. For that reason, the trade sale exit has a negative relation with months held. Nevertheless, the t-stat is -0.7, which means that the coefficient is not different from 0, so it is not statistically significant. There is a positive relation between the trade sale exit and the stake sold. Trade sale exit is a full exit, the strategic buyer will want to acquire the whole company to have complete control over the company. But there is the same problem as in the previous independent variable, the t-stat is 0.9, which means that the coefficient is 0, so it is not statistically significant. 26

27 Secondary Buyout Regression The results of the secondary buyout regression are contrary to the results of the trade sale regression. Coefficients t Stat Coefficients t Stat Deal Size Deal Size - P Months Held Months Held + O Sell Stake Sell Stake - O Table 10 SB Regression Source: Own elaboration based on Mergermarket data There is a negative relation between the secondary buyout exit and the deal size. This is due to the difference with the trade sale exits. As it is previously shown, the trade sale exits usually have large deal size. On the other hand, secondary buyout exits have smaller deal size. It is statistically significant at the 5% level because the t-stat is -2.0 so the coefficient is different from 0. There is a positive relation between the secondary buyout exit and the months held. This result is very important because it with this result it can be seen that when the Private Equity firm has had a long time the target company in its portfolio, there is a high probability of exiting by a secondary buyout because the length of transaction is the shortest although the valuation also is the lower. Unfortunately, this sample is not statistically significant because the t-stat is 0.8, so the coefficient is 0. Finally, there is a negative relation between the secondary buyout exit and the stake sold. That would mean that secondary buyouts exits are more likely to be when the stakes are small but the t-stat is -0.3, almost 0 so it is not statistically significant because it means that the coefficient is 0. 27

28 4. CONCLUSION In general terms, the results of this analysis are very similar to the theory previously mentioned. The Private Equity firms of the sample (Blackstone, Carlyle, Apollo, KKR and CVC) are the largest Private Equity firms and they have the best professionals, therefore, they make very few mistakes in the exit process. If the sample had been from firms with less experience and resources, the results could have changed. The results of the valuation independent variable were a success. In consideration of the adjusted average (removing the 2.5% top and bottom of the original data) the results shown that the highest valuation is for the IPO exit. The lowest valuation is for the secondary buyout exit. The trade sale exit has a higher valuation than the secondary buyout exit because of the synergies created but it still has a lower valuation than the IPO exit. Contrary, the length of the transaction is inverse to valuation. The lowest transaction is the IPO and the fastest transaction is the secondary buyout. Therefore, if a Private Equity firm wants to exit a portfolio company rapidly, the first option would be the secondary buyout taking into account that the valuation would be the lower. On the other hand, if a Private Equity firm is not in a hurry of exit a portfolio company and the market conditions are good, the first option would be the IPO exit. The trade sale exit is slower than the secondary buyout exit because of the anti-trust checks but is still faster than the IPO. About the months held, if the portfolio company has been a short period of time in the portfolio of the Private Equity firm, there will be more chances of a trade sale exit. On the other hand, if the portfolio company has been a long period of time in the portfolio of the Private Equity firm, there will be more chances of a secondary buyout because the PE firm will want to exit the investment as soon as possible. The IPO exit will be more conditioned to the situation of the market. 28

29 The deal size depends on several factors. Usually, trade sale exits are larger than secondary buyout exits. About the IPO exit, is completely conditioned to the stake of the exit, because as it is previously mentioned, the IPO is a partial exit. Therefore, the deal size is proportional to the stake sold. Finally, the stake sold of the IPO is usually the smallest because it is a partial exit. The biggest stake is usually the trade sale exit and then the secondary buyout exit. Although stake sold is a variable that completely depends on each deal, it is difficult to consider it as a pattern. From the perspective of an investment banker, each exit should be taken when: Initial Public Offering exit: If there are good market conditions so the valuation multiples are the highest comparing other exits. The Private Equity firm has enough time to wait until the process is finished because it is very slow (the process increases the months held and the length of transaction is slow). The Private Equity firm wants a partial exit because the stake sold is usually small. If the conditions are met, the investment banker would recommend an IPO exit. Trade Sale exit: the investment banker would recommend a Trade Sale exit if the valuation multiples are also high due to the premium paid because of the synergies. The deal size it is usually the largest. It must be clear that there will not be antitrust issues because it will delay the deal and consequently reduce the price of the deal. And it should be taken when the Private Equity firm wants a complete exit. Secondary Buyout exit: the valuation is inferior than the IPO exit and TS exit because there is not premium paid. It is the fastest exit strategy;; therefore, if a Private Equity firm needs a fast exit, it is the best option. The deal size is usually smaller than the deal size of the TS exit. There are not regulatory issues and the stake sold is usually similar as the TS exit. The final conclusion is that this analysis could be useful for the Investment Banks when they have to advise the Private Equity firms on their exits. 29

30 5. BIBLIOGRAPHY J.P. Morgan (2018) 2018 Global M&A Outlook: Navigating consolidation and disruption. Available in: < Bain & Company (2018) Global Private Equity Report Available in: < aspx> Boston Consulting Group (2016) How Private Equity Firms Fuel Next-Level Value Creation. Available in: < Deloitte (2016) Private company IPOs: is timing everything? Available in: < Michael J. de la Merced (2016) The New York Times: 2016 Was a Year for Undoing Major Deals. Available in: < deals-were-abandoned-in-2016.html> 30

31 Rashida K. La Lande, Gibson, Dunn & Crutcher LLP (2011) Practical Law Company: Private Equity Strategies for Exiting a Leveraged Buyout Available in: < 0347?transitionType=Default&contextData=(sc.Default)& lrts= &firstPage=true&bhcp=1> PwC. PricewaterhouseCoopers (2018) IPO Watch Europe Available in: < annual-review.pdf> PwC. Strategy&. Formerly Booz & Company (2012) Considering an IPO? The costs of going and being public may surprise you. Available in: < IPO.pdf> Analysis Sample from Mergermarket. < 31