In a ‘perfect scenario’, exit for a profitable target company/group acquired by a private equity fund by way of a leveraged buyout1 (‘LBO’) transaction is usually through:

• flotation on a publicly listed market;
• sale of Newco2 set-up to facilitate acquisition of target by a trade purchaser; or
• secondary or further buyout.

Should the acquired target be unprofitable, exit tends to be by one of the following methods:

• winding-up Newco through insolvency proceedings;
• sale of the private equity fund’s shareholdings to the management team, often for a low price; or
• capitalisation of a portion of the claims owed to creditors and/or the transfer of equity capital to the senior or mezzanine lenders for a nominal value who will then proceed to sell the business or the shares at a later date after the restructuring of the company.

On 7 December 2011, Moody’s released a report including its study of 40 large, bubble-era leveraged buyouts. For many of the LBOs featured in the report, Moody’s highlight weak revenue growth, soft earnings performance, a high default rate and stable to declining ratings. Private equity investors await better conditions for an exit.

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