Fund Managers under Pressure: Rationale and Determinants of Secondary Buyouts

Fund Managers under Pressure: Rationale and Determinants of Secondary Buyouts

Sridhar Arcot, Zsuzsanna Fluck, José-Miguel Gaspar, Ulrich Hege

Series number :

Serial Number: 
397/2014

Date posted :

December 01 2013

Last revised :

January 08 2014
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Keywords

  • Leveraged buyouts • 
  • secondary buyouts • 
  • private equity • 
  • limited investmenthorizon • 
  • agency conflicts in fund management

The fastest growing segment of private equity deals are secondary buyouts - sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior.

To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform.

Authors

Real name: 
Sridhar Arcot
Real name: 
Zsuzsanna Fluck
Real name: 
José-Miguel Gaspar