Exit Strategies in Private Equity.

Summary The main goal of a PE fund manager is to receive a return in excess of the price paid for the companies in the portfolio at the time of exit. Various exit strategies are available to fund managers including a trade sale, which is the sale of the company to another PE firm or a secondary buyout for a medium or large portfolio company. Another way to exit is an initial public offering (IPO). A more recent exit strategy is for the portfolio company to pay a preferred dividend to the PE fund in order to repay the initial invested amount. This strategy is also known as a dividend recapitalization, which is sometimes financed with additional debt. Financial economics can help inform the PE fund’s GPs about the different exit routes. Pecking order theory, agency costs, and information asymmetry each offer relevant scientific arguments explaining the observed behaviors.