The Global Economic Impact of Private Equity Report 2008 - World ...

draining public markets of firms. In fact, Panel B showsthat among firms entering LBO status over the 1970–2002period, the fraction of firms exiting LBO status by goingpublic was 11%, which is substantially higher than thefraction of going-private transactions over the 1970–2002period (6.3%). Hence, the net flow into public markets hasbeen positive over the long run. 9 In other words, most of theLBO firms going public originate from acquisitions of privatecompanies and most of the going-private transactions donot return to public markets.Panel B also shows that the most common fate of firmstransitioning out of LBO ownership is to be acquired byanother strategic buyer, which happens to 29% of all doingtheir original LBO in 1970–2002, which works out to 53%of all firms transitioning out of LBO ownership. Of firmsundergoing leverage buyouts, 6% eventually enter financialrestructuring or bankruptcy, which again is higher than theComputstat average but seems low given the high leverageused in these deals. This number also disregards thefact that many distressed firms are eventually financiallyrestructured and continue as independent companies.In fact, for 10% (i.e. 49 cases) of all bankruptcies andrestructurings, the financial distress is resolved by thefirm being reacquired in an LBO transaction. Out of these49 firms, 36 are still in LBO ownership, 10 were acquiredby a strategic buyer and three eventually ended up inbankruptcy a second time.Panel C of Table 7 considers transitions out of LBOownership as a function of the location of the acquired firm,again for the subset of firms that underwent their first LBObefore 2003. One reason why we might expect differencesacross regions is because the liquidity and development oflocal financial markets may affect the propensity of firms tostay in LBO ownership and the types of exit routes that areavailable. For example, the local availability of capital mayaffect the likelihood of LBOs failing, or the ability of a potentialacquirer to buy the LBO firm in a trade-sale. Similarly, thedevelopment of local equity markets may affect the abilityof firms to exit through an IPO. Previous research has shownthat the UK and the US have the most developed financialmarkets, while most emerging markets have relatively smalland underdeveloped financial markets and institutions(e.g. LaPorta et al 1998 and King and Levine 1993). Hence,we would expect exit patterns in the US and UK to exhibitdifferent behaviour compared with the rest of the world.The support in favour of these hypotheses is quite weak.Although the likelihood of LBO firms eventually going publicis somewhat higher in the United States and Canada (13%of firms), it is not significantly different from IPO exits in Asia,Australia and emerging markets (i.e. “Rest of World”, 12%).UK LBOs seem more likely to become acquired than thosein other regions. Bankruptcy and financial restructuringrates are significantly higher in the US and the UK. Theseconclusions should be taken with a grain of salt, however,since they only consider univariate differences and do notcontrol for other factors. We return to this issue in themultivariate regression below.Table 8 considers the ultimate holding periods of LBO firms,taking into account the fact that many firms remain in LBOstatus even though the original LBO sponsor has exited.The holding periods of LBO firms are remarkably long. Themedian firm remains in LBO status for more than nine yearsand only 17% of firms exit LBO status within three years ofthe original LBO transaction. In addition, holding periodsseem to have increased over time. The median firmundergoing the original LBO in the 1980s exited LBO statusafter 6–7 years, while the median LBO firm in the 1995–1999period exited after nine years. Deals that were originallysponsored by private equity funds tend to transition outof LBO ownership more quickly and only 32% of the puremanagement buyouts have transitioned out of LBOownership 10 years after the original transaction.Table 9 analyses the factors determining the longevity ofbuyouts and the likelihood of LBOs eventually returning topublic markets, using logit regressions. Similar to the exitregressions of Table 6, we control for pre-LBO firm status,financial sponsor characteristics, original transaction size,location and time period of the original transaction.Regressions (1) through (4) address the likelihood of firmstransitioning out of LBO status for different time horizons(three, five and nine years). The factors that determine thelongevity of buyouts are largely consistent with the factorsthat determine exit likelihood (see Table 6). LBOs thatoriginate from divisions of other companies exit LBOownership significantly faster than other LBOs and are7% more likely to have exited within nine years. Consistentwith the univariate analysis, pure MBOs remain in thatorgnizational form longer and are 22% less likely to haveexited within nine years. LBOs acquired by more experiencedfunds and funds that are not publicly traded have shorterlongevity, as do syndicated deals. Larger transactionstransition from LBO ownership quicker than smaller deals.LBOs undertaken in Continental Europe are less likely toleave LBO ownership. Finally, holding periods seem to haveincreased significantly over the last 10 years of our sampleperiod. That is to say, the longevity of leveraged buyouts hasincreased significantly compared with the time when Kaplan(1991) wrote his original study.Regressions (5) and (6) analyse the likelihood of LBOsreturning to public markets. As expected, larger deals aremore likely to eventually go public. Interestingly, the presenceof a financial sponsor per se does not significantly increase theprobability of going public, but the presence of experiencedsponsors seems to do so, as does the presence of a financialsponsor syndicate. The development of local equity markets9This argument disregards the fact that many LBOs are buyouts of divisions of public companies, while many trade-sale exits are to public companyacquirers. A more complete flow analysis will have to take this into account as well. We intend to pursue this issue in future research, where we willalso analyse the acquisition and divestment activity of LBO firms in more detail.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Demography 11