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Market conditions and the exit rate of private equity investments in an emerging economy
Authors: Andréa Maria Accioly Fonseca Minardi, Adriana Bruscato Bortoluzzo, Piero Rosatelli, Priscila Fernandes Ribeiro
Number of views: 320
Private Equity (PE) funds are active investors. Besides providing capital, they improve the
governance, operational performance and innovation of the investee companies. However,
potential misalignment between the fund manager and the company owner regarding exit timing
is a limitation of the model. PE funds have a finite-life, and thus they have to liquidate
investments after holding them for a certain period. They tend to time the market to exploit
favorable market conditions and obtain higher selling prices, and consequently, PE funds may
divest before accomplishing the value creation plan. In this article, we use the hazard model to
investigate the magnitude of the impact of market conditions on the exit rate of PE deals in Brazil,
a volatile emerging economy, and if it increases the chances of exiting investments with holding
periods shorter than two years. We analyze a sample of 470 PE deals invested between 1994 and
2014, and we investigate four variables related to market conditions: the stock market priceearnings ratio, the number of IPOs, the Brazilian real (the Brazilian currency) appreciation against
the US dollar and the Brazilian interest rate. Our results show that favorable market conditions
more than double the exit rate and increase the probability of quick flips.