Saving Face or Greedy Opportunism? - External Conditions' Influence on Private Equity Exits

Abstract: This paper aims to contribute to the current discussion where both academia and the private sector debate the benefits and drawbacks of the Private Equity industry. Recent critics have accused Private Equity Funds of acting opportunistically by exploiting beneficial conditions, imposing risks to their portfolio companies and increasing personal remuneration on the expense of extensive lay-offs. Our research focus relates to how external conditions affect the duration of Private Equity investments and investigates the prevalence of opportunistic behavior in the exit strategies and timing of exits. The study applies 12 control variables measuring the conditions in the external environment and tests their impact on the duration and timing of the exit decision for a set of 1 880 deals in 17 European countries between 1997 and 2007. We find that holding periods are higher in economic booms and in mature industries, and decrease in periods of high IPO and M&A activity, expansive governmental budget policies and liberalization of legal systems. Interestingly, we find no clear support for our hypothesis that duration is decreasing in stock market performance.