Private Equity Exits in Global Growth MarketsJosh Lerner, Andrew Speen, Chris Allen, and Ann Leamon

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Private Equity Exits in Global Growth MarketsJosh Lerner, Andrew Speen, Chris Allen, and Ann Leamon

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Table of Figures

F1. Global Value of Private Equity Investments and Buyout-Backed Exits, 2001-2014 8

F2. Global Share of Private Equity-Backed Buyout Exits by Route, 2006-2014 9

F3. Worldwide Private Equity Fundraising, 2001-2014 10

F4. Worldwide Private Equity Investments, 2001-2014 11

F5. Pooled Private Equity Distribution to Paid-In Capital Ratio (DPI),

Net to LPs, by Vintage Year, 2000-2007 12

F6. Weighted Average Holding Period for IPO Exits, 2005-2014 13

F7. Weighted Average Holding Period for Trade and Sponsor-to-Sponsor Exits, 2005-2014 13

F8. Share of Private Equity Exits by Industry Sector, 1998 – March 2015 14

F9. Annual Average Value of Private Equity IPO Exits, 2005-2014 15

F10. Annual Average Value of Sponsor-to-Sponsor and Trade Exits, 2005-2014 16

F11. Exit Route Shares in Developed and GGMs, 2005-2014 16

F12. Index of Annual Number of Private Equity-Backed Initial Public Offerings, 2005 – 2014 17

F13. Index of Annual Number of Private Equity Trade Sales, 2005 – 2014 18

Table of Contents

Introduction and Executive Summary 4

Private Equity Exits in Global Growth Markets 7

Background of Current Exit Environment 8

Fundraising, Investments, and Exits 10

Global Growth Exit Data 14

Exits By Sector 14

Exits by Size 14

Exits by Route 15

IPOs 17

Trade Sales 17

Sponsor-to-Sponsor Sales 18

Conclusion 19

Introduction and Executive Summary

Investors have become increasingly comfortable with the ability of private equity in established, developed markets to achieve exits, whether through initial public offerings (IPOs), trade sales, sponsor-to-sponsor buyouts, or recapitalizations. The liquidity constraints brought on by the financial crisis of 2008-2009 and the resulting risk aversion of investors, though, forced global exit markets to recalibrate and adapt to a new economic environment. As the world’s exit markets sought to regain their footing, some investors questioned whether global growth markets (GGMs) would respond as favorably as developed markets to these economic challenges. This study undertakes a detailed evaluation of global private equity exits in order to identify and discern the impact on investors of any differences between the two markets.

The exit market differences are examined using multiple datasets designed to identify variations between the global growth and developed exit markets. Additionally, our analysis is supplemented with publicly available data from a variety of industry sources. This extensive investigation found little evidence of any substantive differences between developed country and global growth exit markets. Both markets’ exit environments have reacted in concert to the financial crisis and have achieved equivalent outcomes, despite unprecedented volatility in private equity markets.

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Our analysis of exits by industry sector does not show consistent, substantive differences between the two markets. The two markets do exhibit dissimilarities in the mix of private equity exit routes, however. In examination of the three main routes of successful exits, we find that PE-backed IPOs occur five times more often in GGMs than they do in developed markets, sponsor-to-sponsor exits are more than twice as common in developed markets than in GGMs; and trade sales are over 1.5 times more common in developed markets. Because IPOs have traditionally enjoyed relatively higher returns than sponsor-to-sponsor exits, GGM investors should be comforted by their higher proportion in GGMs. The exit route differences between the markets shrink somewhat if BRIC nations are eliminated from the analysis, but GGMs still maintain a higher proportion of IPO exits and a smaller proportion of trade sales and sponsor-to-sponsor exits. Specifically, PE firms exit via IPO roughly three times more in non-BRIC GGMs than in developed markets; sponsor-to-sponsor deals and trade sales are respectively twice and 1.2 times more prevalent in developed countries than in non-BRIC GGM countries. Overall, the analysis suggests that GGMs offer PE exit environments that are comparable to those in developed economies.

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Exits in Global Growth Markets This study compares private equity exit markets in two distinct economic areas: countries with fully developed economies, such as the U.S., Japan, and Germany, and countries where economic growth shows promise of eventual entry into the class of the more developed nations, for example, Thailand, Kenya, and India. The latter group is commonly referred to as “global growth markets” (GGMs). They account for about 60% of world GDP and contain more than 80% of the world’s population.1 While the growth rate in GGMs has slowed, GGMs accounted for three-fourths of global growth in 2014 and are forecast to account for more than 70% in 2015.2 Despite the size and potential of GGMs, investors remain concerned that given the relatively short history of private equity in these markets, they may face more limited exit opportunities than developed markets.

This paper casts a broad net to discover whether there are any differences in exit markets between GGMs and developed markets. To appreciate the cyclical nature of these markets and understand the causes of current exit market stress, we begin with a look at the background and current state of exit activity in global

markets. Next, we compare the three major phases of private equity capital flow: fundraising, investments, and exits, across both developed and global growth markets, in search of any notable differences at the macro level. Finally, using data from Capital IQ and VentureXpert, as well as a number of independent industry analyses, we identify exit anomalies between the two markets. We compare five

important aspects of exit markets: (1) holding period, (2) distributed to paid-in capital ratio, (3) industry sector, (4) size of transaction, and (5) exit route (IPO, trade sales and sponsor-to-sponsor sales).

It is important to note at the outset that the list of GGMs varies slightly by source. For example, the definition employed by the International Monetary Fund (IMF) is slightly different from that employed by the Emerging Market Private Equity Association (EMPEA), both of which differ from the Bella definition. Under the Bella definition, which we use in certain exhibits, we adopt a broad list of GGMs. In particular, developed countries are comprised of all OECD member nations with the exceptions of: Chile, Czech Republic, Estonia, Hungary, Israel,

1World Bank, World Development Indicators database, (accessed June 2, 2015). We define developed countries as OECD members, with the exceptions of Chile, Czech Republic, Estonia, Hungary, Israel, South Korea, Mexico, Poland, Slovak Republic, Slovenia, and Turkey. GGMs include all non-developed countries. GDP is in purchasing power parity (PPP), constant 2011 international dollars. GGMs excluding BRIC countries (including Hong Kong) account for roughly 32% of world GDP and 46% of world population. These statistics are for 2013, the most recent data available. According to IMF definitions (as of 2014), GGMs account for 56.9% of world GDP and 85.3% of world population. See International Monetary Fund, World Economic Outlook: Uneven Growth—Short- and Long-Term Factors, (Washington, DC: IMF, April 2015), p. 149. 2International Monetary Fund, World Economic Outlook: Uneven Growth—Short- and Long-Term Factors, (Washington, DC: IMF, April 2015), pp. xv, 1.

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South Korea, Mexico, Poland, Slovak Republic, Slovenia, and Turkey. GGMs refer to all countries excluding developed market countries. We include China, Hong Kong (which we identify as part of China in our analysis of BRIC countries), Taiwan, and Singapore in our list of GGMs.

This extensive exploration detected only one substantive difference between the two markets: the path taken to exit. In particular, we find that GGM exits exhibit a higher relative frequency of IPOs compared to developed markets. On the surface, this may suggest that exit market conditions are more favorable in GGMs given the historical valuation premiums afforded to IPO exits (relative to acquisitions and secondary sales) on average. We would temper that interpretation, however, as a few structural reasons may also explain a higher propensity to exit via IPO. In summary, though, our analysis of private equity exit markets finds no specific reason for an investor to prefer developed markets over global growth markets.

Background of Current Exit EnvironmentWe begin with a quick review of global exit markets. Private equity exits are cyclical— expanding and contracting along with the rest of the world’s economy. The performance of equity markets are a major contributing factor to the cyclicality of private equity exits, but other macroeconomic factors, such as credit market liquidity and investor risk tolerance, play significant roles as well. Exit cyclicality surrounding the 2008 global financial crisis is illustrated in Figure 1 below. The sensitivity of buyout-backed exits to economic cycles can be seen in the 80% drop in global buyout-backed exit values from 2007 to 2009.

The route selected for exit is also cyclical, as each channel offers unique paths to liquidity and returns. Traditionally the highest returns have been generated by IPO exits, followed by trade sales and sponsor-to-sponsor deals. As shown in Figure 2 below, both the value and volume of exits have recovered from the two-year dip of 2008 and 2009, and have exceeded pre-crisis levels.

GGMs provide excellent examples of the flexible nature of exit channels.3 Volatile public markets in India in 2011 provide a prime example. As noted in Bain’s 2011 India Private Equity Report, “For PE funds with portfolio holdings in specific

Figure 1.

Global Value of Private Equity Investments and Buyout-Backed Exits, 2001-2014.

Source: Adapted from EMPEA and Bain & Co. For buyout-backed exits, see Bain & Company, Global Private Equity Report, 2015, (Boston: Bain and Company, 2015) p. 3. For PE investments 2001-2007, see EMPEA Industry Statistics, Q3 2013, (Washington, D.C., EMPEA, 2013). For PE investments 2008-2014, see EMPEA Industry Statistics, Q4 2014, (Washington, D.C., EMPEA, 2014). PE investments include buyout, growth, PIPE, mezzanine, special situations, and venture capital strategies, and exclude real estate funds, fund of funds, and secondary investments. For more information, see EMPEA, 2014 Annual Fundraising and Investment Review (Washington, D.C., EMPEA, 2014), p. 3.

Sources: Investments from EMPEA; Exits from Bain & Co.

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3These examples of exit flexibility are based on the two largest GGM countries, where a sizable number of exits provides sufficient data to see a trend. There is not yet enough data in a single non-BRIC GGM country to confidently demonstrate similar exit route flexibility, but there is no reason to assume these markets will behave any differently than their BRIC counterparts.

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sectors like consumer goods, which are less dependent on the public equity markets as their primary exit route, the near term options [for exits] look even more flexible. Disposal of these assets through sales to strategic acquirers and a strong market for secondary sales to other private investors should provide a good cushion against public market choppiness.”4 China provides another example of exit market adaptation. The temporary suspension of mainland China IPOs, imposed by the government from November 2012 to December 2013, altered the main exit route for Chinese private equity investments. IPO exits had historically comprised over half of PE-backed (including venture capital) Chinese exits since 2007,5 but with this route temporarily suspended on the Shanghai and Shenzhen Stock Exchanges, China’s exit market shifted proportionately towards trade sales. As noted by Ringo Choi, EY’s Asia-Pacific IPO Leader, in the firm’s 2014 Asia-Pacific PE Outlook, “Investors in Asia are unwilling, or unable, to wait for IPO opportunities to return. This comes despite the announcement that mainland China’s capital markets will reopen as soon as January 2014. Because of this, what we’re seeing is GPs turning away from IPOs and following the US or European PE model of doing deals with corporates.”6 These examples demonstrate the flexibility and resilience of exit markets as they shift among exit routes in compensation for instability among more dominant paths.

Flexible exit channels can help smooth cyclicality, but even a temporary lull in exit activity, like that in 2008-2009, can result in a large inventory of un-exited portfolio companies. Although the overhang of boom-year investments has diminished, in 2012 two-thirds of buyout funds closed between 2006 and 2008 had distributed under 40% of LPs’ paid-in capital.7 While GPs completed over 10,000 buyout deals between 2003 and 2007, roughly 4,000 (40%) exits were recorded between 2008 and 2012.8

The underlying cause of the backlog of un-exited companies in the years following the financial crisis is the large number of private equity investments that were made during 2007 and 2008. Ample cash provided by the highly liquid capital markets during this period fueled competition over portfolio

Figure 2.

Global Share of Private Equity-Backed Buyout Exits by Route, 2006-2014.

Source: Analysis of Preqin data in: Preqin, “2014 Private Equity-Backed Buyout Deals and Exits Reach Highest Levels Since the Global Financial Crisis,” January 5, 2015. While trends are consistent, “Total Value of Exits” differs from Figure 1 due to the use of different sources.

IPO Sponsor-to-Sponsor/Restructure

Trade Sale Total Value of Exits ($ Bil.)

Number of Exits

2006 17% 31% 52% 177 955

2007 15% 33% 52% 294 1,215

2008 7% 35% 58% 129 813

2009 17% 33% 50% 91 655

2010 19% 31% 50% 240 1,126

2011 15% 32% 53% 326 1,376

2012 14% 31% 55% 301 1,435

2013 19% 29% 52% 330 1,550

2014 17% 33% 50% 428 1,604

4Bain & Company, India Private Equity Report 2011, 2011, p. 33.5Michael Prahl, Alessandro Cannarsi, and Claudia Zeisberger, “Private Equity Exits in China and India,” INSEAD Working Paper, 2011. “No Exit: As the IPO Market Dries Up, How will

China’s Nascent Private Equity Sector Unload Investments?,” China Economic Review, December 1, 2012.6Ernst & Young, A Maturing Market: Asia-Pacific Private Equity Outlook 2014, 2014, p. 28. 7Bain & Company, Global Private Equity Report 2013,

(Boston: Bain and Company, 2013), p. 15.8Bain & Company, Global Private Equity Report 2013, (Boston: Bain and Company, 2013), p. 15.

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companies and drove valuations to historic highs. The rise of these valuations is best evidenced by the increase in U.S. leveraged buyout multiples in 2007 to 9.7 times earnings before interest, taxes, depreciation and amortization (EBITDA), relative to about 8.2 times in 2005-06 and between roughly 6.0- and 7.0 times from 2001-04.9

By mid-year 2013, Bain analysis found that only 40% of the buyout overhang came from deals in 2008 or earlier (i.e., past the typical holding period for buyouts).10 By the middle of 2014, the PE market experienced robust exit activity and the unrealized value of boom-year investments faded.11

Exit markets, like all aspects of private equity, are not static, and respond to the cycles of global capital markets. Exit markets continued to adapt to cope with the challenges of exiting the over-valued, pre-crisis investments using a shifting mix of trade sales and sponsor-to-sponsor deals to eventually eliminate the inventory of un-exited companies. Noted in Bain’s 2013 analysis of the PE industry, “…look for sponsor-to-sponsor deals to increase even in India, China and other emerging economies, where they have been relatively uncommon to date. The slowdown in IPOs… makes secondary transactions a viable backstop.”12 These changes, however, may not be permanent, and the mix of exit routes may readjust to fit with the more favorable economics of more recent investments.

Globally, exit markets have proven resilient in rebounding from the financial crisis. A global perspective may obscure

critical differences within global markets, though, since our analysis suggests that developed markets accounted for over 85% of private equity exits in 2014.13 A closer examination of the differences between developed and global growth markets is warranted, and is the focus of the balance of this paper. We begin this effort in the next section, which looks at exits along with two other major aspects of private equity, fundraising and investments, to see if they behave any differently in developed and global growth markets.

Fundraising, Investments, and ExitsPrivate equity exits are the culmination of a process that is fed by fundraising and investment. The momentum of these precursors exerts a powerful influence on exit market behavior. Specific exit markets cannot be properly compared without considering differences in capital flows, so we begin with fundraising, proceed to investments, and then turn to exit markets.

Figure 3, below, shows the value of private equity fundraising in both GGM and developed markets. From the 2008 peak to 2012, fundraising dollars dropped in absolute terms, but in 2012, GGMs attracted over 20% of worldwide fundraising—a record high share. GGM fundraising has since dropped as a percentage of global fundraising to 14% (as of 2014), though this is still twice the average from 2001-2008.

Interestingly, the investment rate of private equity funds of both GGM and developed markets was remarkably similar. Figure 4, below, shows investments in GGMs falling 36.5% from the 2007 peak, closely tracking the activity in developed markets, which fell by 36.0%. From 2007’s peak to 2014, GGMs

9Shasha Dai, “Deal Multiples for Leveraged Buyouts Reach 2007 Levels,” WSJ.com, December 31, 2014.10Bain & Company, Global Private Equity Report 2014, (Boston: Bain and Company, 2014), p. 38.

11Bain & Company, Global Private Equity Report 2015, (Boston: Bain and Company, 2015), pp. 28-29.12Bain & Company, Global Private Equity Report 2013, (Boston: Bain and Company, 2013), p. 50.

13Analysis of VentureXpert data (accessed June 4, 2015) of IPO, trade sale, and secondary exits for funds classified as buyout, VC, growth, generalist, or mezzanine stage.

Figure 3.

Worldwide Private Equity Fundraising, 2001-2014.

Source: Adapted from EMPEA. 2001-2005 data from EMPEA industry Statistics 2012. 2006-2014 data from EMPEA Industry Statistics Q4 2014. PE investments include growth, mezzanine, special situations, and venture capital strategies, and exclude real estate funds, fund of funds, and secondary investments.

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maintained a roughly consistent share (within 3% of 2007’s figure) of global investments, 11% on average. That is, despite the stress of a once-in-a-generation financial crisis, the relative disbursement of private equity investment remained relatively consistent in both GGMs and developed markets.

Figure 4, above, also shows the substantial difference in the scale of investments in GGMs and developed markets. Most of the investments that created the global overhang of un-exited firms were made between 2006 and 2008, a time when eight to nine times as much private equity was invested in developed markets as in global growth markets. While this ratio was in fact lower than in previous years, the relative burden of un-exited portfolio companies is important to recall when evaluating these two exit markets. If it can be shown that GGM exit markets do not behave fundamentally differently than developed markets, then reducing the burden of un-exited investments should be easier to accomplish there than in developed markets, especially given the still-higher economic growth rates forecast for GGMs than developed markets.14

Exit rates can be compared across the two markets by using vintage year distribution data supplied by Cambridge Associates. Figure 5, below, compares pooled distributed to paid-in capital (DPI) ratios, by vintage year, for GGMs,

14International Monetary Fund, World Economic Outlook: Uneven Growth—Short- and Long-Term Factors, (Washington, DC: IMF, April 2015), p. 170

Figure 4.

Worldwide Private Equity Investments, 2001-2014.

Global Growth Markets

Source: 2001-2007 data from EMPEA industry Statistics 2012. 2008-2014 data from EMPEA industry statistics Q4 2014. PE investments include growth, mezzanine, special situations, and venture capital strategies, and exclude real estate funds, fund of funds, and secondary investments.

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The holding period of a private equity investment provides another useful metric of exit efficacy. The VentureXpert database calculates the holding period, where possible, for private equity investments. To discern any possible differences between different exit routes, we calculated holding periods for companies exited via IPO separately from trade and sponsor-to-sponsor exits. As shown in Figures 6 and 7 below, these data show that while holding periods have lengthened somewhat since the financial crisis, those for GGMs are typically shorter than those in developed markets. For example, the weighted average holding period for IPO exits that occurred during 2008-2014 was 6.0 years in the developed countries, 5.3 years in GGM ex-BRIC countries and 3.8 years in all GGMs. For trade sale and sponsor exits, the respective figures were 5.8 years, 4.7 years, and 4.6 years.

U.S. markets, and non-U.S. developed markets. The DPI shows the percentage of invested capital that has been returned to limited partners, and provides an excellent metric for evaluating exit efficiency. We limit our observations through vintage year 2007 funds, as later vintage years provide less meaningful return data due to higher levels of un-exited investments. The DPI values shown below show no consistent trend in differences with comparison markets. While, for example, GGM PE/VC funds distributed a higher proportion of capital to LPs relative to U.S. venture capital funds for vintage years 2000-2005, the reverse appears to be true for the later vintage years. Relative to developed market PE/VC funds excluding the U.S., GGM funds appear to have outperformed for three of the eight vintage years.

Figure 5.

Pooled Private Equity Distribution to Paid-In Capital Ratio (DPI), Net to LPs, by Vintage Year, 2000-2007.

Source: For GGM and Global ex U.S. Developed Markets data, see Cambridge Associates, “Global ex U.S. Developed Markets and Emerging Markets Private Equity & Venture Capital Index and Selected Benchmark Statistics,” (Cambridge, MA: Cambridge Associates, March 2014), pp. 12, 24 (data as of March 31, 2014). For U.S. buyout and growth data, see Cambridge Associates, “Global Buyout & Growth Equity Index and Selected Benchmark Statistics,” (Cambridge, MA: Cambridge Associates, June 2014), p. 26 (data as of June 30, 2014). For U.S. VC data, see Cambridge Associates, “U.S. Venture Capital Index and Selected Benchmark Statistics,” (Cambridge, MA: Cambridge Associates, June 2014), p. 12 (data as of June 30, 2014).

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This section has examined private equity fundraising, investment, distributed to paid-in capital ratios, and the length of the holding period for GGM and developed markets. We’ve found little to distinguish the two markets, with the exception of shorter holding periods. While no prominent differences are apparent, the slight variations seem to favor the GGM investor. A more granular investigation of exits follows in the next section.

Figure 6.

Weighted Average Holding Period for IPO Exits, 2005-2014.15

Source: VentureXpert (accessed June 2015). Based on 1,658 developed market exits; 1,307 GGM exits; and 357 non-BRIC GGM exits.

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Weighted Average Holding Period for Trade and Sponsor-to-Sponsor Exits, 2005-2014.

Source: VentureXpert (accessed June 2015). Based on 14,651 developed market exits; 1,238 GGM exits; and 726 non-BRIC GGM exits.

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15Averages in Figures 6 and 7 are weighted by the number of exits in a given country, so that a country with more deals is weighted more in this analysis than a country with just a few deals.

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Global Growth Exit Data To refine the comparison of global growth and developed market exit environments, the Bella Research Group has compiled an extensive database of global private equity exits. The Bella Research Group database contains over 7,100 successfully exited GGM and developed market PE deals from the Standard & Poor’s Capital IQ database during the period from January 1, 1991 to March 31, 2015. Our dataset excludes bankruptcies and only includes deals where it was possible to identify the nature of the initial investment (minority or majority), and where we could match the identity of the PE firm at investment and exit. Our dataset looks at PE activity in a broad sense, including all PE/VC-style investments that qualify as M&A as defined by Capital IQ: such as leveraged buyouts (LBOs), venture capital investments, mezzanine investments, management buyouts (MBOs), recapitalizations, going private transactions. Consistent with academic literature, we also exclude transactions labelled by Capital IQ as private placements.16

For our second dataset we use VentureXpert, which contains over 18,000 exits from January 1, 2005 to December 31, 2014. In this dataset, we similarly exclude bankruptcies, including only exit types identified as IPO, secondary sale, or trade sale. Despite higher deal counts, this dataset is slightly more refined with respect to the scope of PE included. In particular, we screen at the fund stage to only include funds with a focus of venture capital, buyout, generalist, or mezzanine stage. The following analysis relies on these two datasets.

Exits By SectorAn examination of the distribution of exits by industry sector fails to find any striking differences between developed markets and GGMs, as shown in Figure 8, below. Developed markets show more focus on the industrial sector, but the remaining sector distributions are within 10 percentage points of each other.

Exits by SizeTo compare exits by size we examined the value of PE-backed IPO exits independently from sponsor-to-sponsor and trade sale exits. These differ due to the imbalance in valuation disclosure of the events. Nearly all IPOs in the VentureXpert database have disclosed values, yet values for fewer than half of

Figure 8.

Share of Private Equity Exits by Industry Sector, 1998 – March 2015.

Source: Bella Research Group analysis of S&P, CapitalIQ data (accessed April 28, 2015). Based on 6,604 developed market exits; 521 GGM exits; and 377 non-BRIC GGM exits.

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16See, for example, Per Strömberg, “The New Demography of Private Equity,” in Globalization of Alternative Investments, Working Papers Volume 1, World Economic Forum, January 2008. Strömberg explained some of the peculiarities: “…a

substantial number of the transactions by buyout funds are classified as ‘private placements’ rather than acquisitions. In most cases, these are not proper LBO transactions, but rather acquisitions of minority stakes or follow-on

investments” (p. 6). A similar methodology was employed in many subsequent academic studies of the private equity industry.

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Annual average values for sponsor-to-sponsor and trade sale exits show a similar differential between developed market and GGM exit values, as shown in Figure 10, below. The overall average over the past five years indicates that the values of these exits are roughly 80% as big in developed markets as in GGMs. These exits, however, reflect companies at many different stages, and present a less meaningful comparison. Lower entry valuations in GGMs, for example, may account for much of this difference.

Exits by RouteThe type of exit transaction—IPO, trade sale or sponsor-to-sponsor—has a significant impact on investor returns. It is important to note, however, that a number of factors contribute to the exit decision. Certain external factors that play into a region’s exit environment include its market development and level of industry fragmentation, regulatory barriers inhibiting acquisitions by foreign firms, debt market conditions, and the proportion of later-stage versus earlier-stage investments.17

the trade (39%), and sponsor-to-sponsor (25%) exits were available. Figure 9 below shows the average value, by year, of IPO exits in developed markets and GGMs. While the value of IPO exits was higher on average in developed markets than in GGMs from 2008-2013, we find the reverse to be true for 2014. We do find, however, that non-BRIC GGM IPO exits exhibit lower IPO values across the sample period.

17These types of considerations are discussed in: Onur Bayar and Thomas J. Chemmanur, “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists,” Journal of Financial

and Quantitative Analysis 46, no. 6, December 2011, pp. 1755-1793; Michael Prahl, Alessandro Cannarsi and Claudia Zeisberger, “Private Equity Exits in China and India” INSEAD Working Paper 2011, p. 13; Ernst&Young, Globalizing Venture

Capital: Global Venture Capital Insights and Trends Report, 2012, p. 7; Yingdi Wang, “Secondary Buyouts: Why Buy and at What Price?,” Journal of Corporate Finance 18, no. 5, December 2012, pp. 1306-1325.

Figure 9.

Annual Average Value of Private Equity IPO Exits, 2005-2014.

Source: VentureXpert (accessed June 2015). Based on 1,661 developed market exits; 1,312 GGM exits and 360 non-BRIC GGM exits.

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“Typically, the best investor outcome is an IPO, which has been shown to generate higher returns, on average, than trade sales or sponsor deals.”

Typically, the best investor outcome is an IPO, which has been shown to generate higher returns, on average, than trade sales or sponsor deals.18 Figure 11 below summarizes the overall distribution of exits by route in each market since 2005.

Considering the typical returns generated by each exit route, and the shares shown in Figure 11 above, the mix of exit routes in both the overall GGM as well as the GGM ex-BRIC would likely generate higher returns than those found in developed markets. A brief overview of each exit route follows.

18One study of privately held U.S. firms found that a liquidity discount of roughly 22% exists in takeovers. See James Brau, Bill Francis and Ninon Kohers, “The Choice of IPO versus Takeover,” Journal of Business 76 no. 4, 2003, pp. 583-612. In addition, a theoretical examination of

VC-backed firms predicted that the average valuation of firms going public will be greater than the valuation of firms being acquired, primarily because of the mix of the types of firms that go public versus firms that are acquired. See Onur Bayar and Thomas J. Chemmanur, “IPOs versus Acquisitions and

the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists,” Journal of Financial and Quantitative Analysis 46, no. 6, December 2011, pp. 1755-1793.

Figure 10.

Annual Average Value of Sponsor-to-Sponsor and Trade Exits, 2005-2014.

Source: VentureXpert (accessed June 2015). Based on 5,126 developed market exits; 498 GGM exits; and 274 non-BRIC GGM exits. Table reports mean rank value inc. net debt (transaction value less liabilities assumed plus net debt of the target company).

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Figure 11.

Exit Route Shares in Developed and GGMs, 2005-2014.

Source: VentureXpert (accessed June 2015). Based on 16,312 developed market exits; 2,563 GGM exits and 1,099 non-BRIC GGM exits

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IPOsPrivate equity’s preferred exit route, the IPO, is more common in GGMs than in developed markets. This finding appears to be robust to even non-BRIC GGMs. The IPO share of all exits in non-BRIC GGM nations since 2005 (33%) is roughly three times that in developed markets (10%), while the respective figure for all GGMs (51%) is five times that in developed markets. Holding periods for PE-backed IPOs, as we saw in Figure 6, are also generally shorter in the GGM ex-BRIC markets than in developed markets.

PE-backed IPOs globally have fluctuated widely since 2005, as seen below, where we have indexed the number of IPOs in each market to a starting value of 100 beginning in 2005. The decline in GGM IPOs in 2012 and 2013 is largely attributed to the temporary suspension of mainland China IPOs from November 2012 to December 2013. We also see a decline, however, in non-BRIC GGM IPOs, which can largely be attributed to a weak IPO market in South Korea.19

Trade SalesAbout 39% of GGM exits occur via trade sales (for non-BRIC GGMs, the figure is 55%). This route typically generates smaller returns than IPOs,20 but it provides an attractive exit option given the smaller public equity markets found in GGMs. Additionally, since trade sales are not as reliant on public equity markets, they tend to be less cyclical and provide more consistent exit liquidity for private equity investors. Figure 7 also showed the consistently shorter holding periods for trade exits in both BRICs and GGMs ex-BRICs, compared to developed markets.

The growth in the number of trade sales in GGMs closely follows the trend in developed markets. Figure 13, below, indexes the number of trade sales and shows the slightly higher growth rates for GGMs relative to developed markets. Excluding BRICs, trade sales growth in GGMs appears equivalent in both markets over the past two years.

19Song Jung-a, “S Korea’s private equity groups face tough sell,” Ft.com, September 21, 2014.20James Brau, Bill Francis and Ninon Kohers, “The Choice of IPO versus Takeover,” Journal of Business, 76:4 (2003): 583-612.

Figure 12.

Index of Annual Number of Private Equity-Backed Initial Public Offerings, 2005 – 2014.

Source: VentureXpert (accessed June 2015). Based on 1,661 developed market exits; 1,317 GGM exits and 365 non-BRIC GGM exits.

250

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020072006 2008 2009 2010 2011 2012 2013 20142005

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Sponsor-to-Sponsor SalesMany of the portfolio companies due for exit remain too small and underdeveloped for an IPO or a trade sale. By selling the company to another GP in a sponsor-to-sponsor sale, promising companies can benefit from more time, capital, and expertise before eventually completing an exit. These deals are less popular with limited partners, however, who endure additional transaction fees, and often find themselves in funds with overlapping investments. As with trade sales, sponsor-to-sponsor exits add liquidity to the exit environment, and recent evidence suggests that they generate returns close to IPO exits.21

About 25% of exits in developed markets are sponsor-to-sponsor deals, but this type of exit accounts for less than 10% of GGM exits. We note, however, that sponsor-to-sponsor deals are growing in GGMs, particularly in the world’s two largest global growth markets, China and India. McKinsey reports that such exits accounted for 30% of all exits by value in India in 2012-13, relative to 10% in 2010-11 and 5% in 2006-07.22 Similarly, in 2013, one author noted that the universe of “quality secondaries”— i.e., PE-invested deals that “…meet the prime investment criteria of top tier PE firms” — is forecast to grow 15%-25% a year in China.23

21A recent working paper finds overall buyout exit realized returns from IPO and sponsor-to-sponsor returns equivalent, see Ann-Kristin Achleitner, Oliver Bauer, Christian Figge, and Eva Lutz, “Exit of Last Resort? Empirical Evidence on the

Returns and Drivers of Secondary Buyouts as Private Equity Exit Channel,” (May 25, 2012). 22Vivek Pandit, “Private equity in India: Once overestimated, now underserved,” McKinsey Insights and Publications,

February 2015.23China First Capital, “Secondaries: The Necessary & Attractive Exit for Private Equity Deals in China,” (Shenzhen: China First Capital, 2013), p.2-4.

Figure 13.

Index of Annual Number of Private Equity Trade Sales, 2005 – 2014.

Source: VentureXpert (accessed June 2015). Based on 10,794 developed market exits; 1,010 GGM exits; and 599 non-BRIC GGM exits.

20072006 2008 2009 2010 2011 2012 2013 20142005

Developed GGM GGM ex-BRIC

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“By selling the company to another GP in a sponsor-to-sponsor sale, promising companies can benefit from more time, capital, and expertise before eventually completing an exit.”

ConclusionOur study has shown the cyclical and adaptive behavior of the overall global private equity exit market as it rebounded from the financial crisis. With one exception, exit routes, there were no evident deviations between developed market and GGM PE exit market behavior. In the years before, during, and after the financial crisis, there was no marked difference between developed market and GGM private equity fundraising, investments, or exits. While volatile, exit rates appear strong in both markets as of 2014, in line with pre-crisis levels with respect to IPOs and trade sales (Figures 12 and 13). Non-BRIC GGMs, however, appear to exhibit somewhat slower growth relative to comparison groups in terms of IPO exits, as evidenced by Figure 12. Looking at exits by industry sector, we see a higher proportion of exits from industrial companies in developed markets and a slightly higher proportion of exits from financials companies in GGMs.

Overall, we find one unique characteristic differentiating developed and global growth market exits. This distinction, the higher frequency of IPOs, may favor the GGM private equity investor. The generally higher returns from IPO exits, which are more common as a proportion of successful exits in GGMs as well as GGM ex-BRICs, provides GGM private equity investors with potentially higher returns than developed market investors. Our analysis suggests that GGMs offer PE exit environments that stand up to those in developed economies and worries about exits from GGM private equity deals are misplaced.

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Funding for this project was provided by The Abraaj Group and is gratefully acknowledged.