Fund Managers Under Pressure: Rationale and Determinants of Secondary Buyouts

63 Pages Posted: 6 Oct 2013 Last revised: 8 Oct 2014

See all articles by Sridhar Arcot

Sridhar Arcot

ESSEC Business School - Finance Department

Zsuzsanna Fluck

Michigan State University - Department of Finance

Jose-Miguel Gaspar

ESSEC Business School

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Date Written: March 3, 2014

Abstract

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.

Keywords: leveraged buyouts, secondary buyouts, private equity, limited investment horizon, agency conflicts in fund management

JEL Classification: G35, G32

Suggested Citation

Arcot, Sridhar and Fluck, Zsuzsanna and Gaspar, Jose-Miguel and Hege, Ulrich, Fund Managers Under Pressure: Rationale and Determinants of Secondary Buyouts (March 3, 2014). Journal of Financial Economics (JFE), Forthcoming; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 397/2014. Available at SSRN: https://ssrn.com/abstract=2332801 or http://dx.doi.org/10.2139/ssrn.2332801

Sridhar Arcot

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

Zsuzsanna Fluck

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

Jose-Miguel Gaspar (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
Cergy-Pontoise, 95021
France
+33 1 3443 3374 (Phone)
+33 1 3443 3212 (Fax)

HOME PAGE: http://www.essec.edu

Ulrich Hege

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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