Determinants of exit mode for leveraged buyouts in South Africa
Date
2015-05-29
Authors
Seetswane, Seetsele
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Abstract
The dramatic growth in South Africa’s private equity and leveraged buyout
market in recent years underlines the increased significance of the asset class
and its importance in the asset allocation decision. This growth has equally
been accompanied by the emergence of write-offs and unrealized investments
carried at cost by private equity funds, eroding returns and generated value.
This phenomenon mounts pressure on private equity practitioners to formulate
and evolve better exit strategies in the face of an unfavourable exit climate
compounded by dwindling arbitrage opportunities. This study therefore seeks to
explore and establish the determinants of exit mode in the private equity
industry thereby driving the evolution of exit strategy formulation and also
contributing to the limited understanding of decision making in the industry. The
study employs a mixed methods approach or methodological triangulation to
provide empirical evidence supported by qualitative findings to achieve the
objectives of identifying factors which predict or impact on the choice of exit
mode for leveraged buyouts.
Using a sample of 46 exited investments in the South African private equity
industry, the study used various statistical techniques namely; descriptive
analysis, independent samples t-tests, one-way analysis of variance (ANOVA),
trinomial logistic regression modelling and robustness tests to identify the
explanatory factors of exit mode for leveraged buyouts. The study found
empirical evidence that the portfolio company’s operating performance and size
(total investment) can significantly distinguish between choice of initial public
offering (IPO) and secondary buyout as exit modes.
The other determinants or predictors of exit mode; investment holding period
and industry concentration were found not to have a significant contribution to
the choice of exit mode via the quantitative analysis. Elite interviews were
conducted with private equity experts selected through a purposive sampling
technique. The findings of the qualitative analysis confirmed and supported the
empirical findings pertaining to the predictive abilities firm size and operating
performance in the choice of exit mode. Respondents to the study confirmed
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that investment holding period plays a diminished role as a predictor of exit
mode owing to timing, macro-economic factors and the experience of the
private equity manager all playing a either a direct, a mediating or moderating
role in the choice of exit mode. In the South African context, respondents
supported the consolidation hypothesis and justified that South African
companies’ acquisition strategies are driven by the need to consolidate locally
in order to gain access to new markets and improve the parent company’s
market share. Therefore, portfolio companies in highly fragmented industries
are ideal targets for strategic buyers and as such are likely to be exited via trade
sales. This study also revealed that the choice of exit mode has no bearing on
the ex-post realized exit multiple.
The key findings of this study can be surmised as follows; the portfolio
company’s operating performance and size are significant predictors of choice
of exit mode. Investee companies in highly fragmented industries are likely to
be exited via trade sales to strategic acquirers. Despite these findings, a fund
manager’s competitive position to originate superior deal flow as well as
negotiate higher exit multiples is greatly enhanced by the manager’s industry
experience and his/her professional network in the financial/investor community.
Other factors such as the robustness of the mergers and acquisitions markets,
pressure from fundraising activities and existence of multiple arbitrage
opportunities are also potential key drivers of exit strategy.
Description
Keywords
Leveraged buyouts ;Consolidation and merger of corporations -- South Africa.