PRIVATE EQUITY RETURNS: AN EMPIRICAL EXAMINATION OF THE EXIT OF VENTURE-BACKED COMPANIES

Sanjiv Ranjan Das · Murali Jagannathan · Atulya Sarin A

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Private Equity and Venture Capital Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

Inthispaper, weexamine52322financingroundsin23208uniquefirms, overtheperiod 1980 through 2000 by venture and buyout funds and estimate the probability of exit, time toexit, exitmultiples, andtheexpectedgainsfromprivateequityinvestments.Theexpected multiple (after accounting for dilution and the probability of exit) ranges from a low of 1.12 for late-stage firms to a high of 5.12 for firms financed in their early stages. We find that the gains from venture-backed investments depend upon the industry, the stage of the firm being financed, the valuation at the time of financing, and the prevailing market sentiment. Our study is a first step in understanding the risk premium required for the valuation of private equity investments.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1992The Cross-Section of Expected Stock Returns 1997Industry costs of equity 1995The New Issues Puzzle 1991The Long‐Run Performance of initial Public Offerings 1990The structure and governance of venture-capital organizations 2002Venture Capital and the Professionalization of Start‐Up Firms: Empirical Evidence 1991Venture Capitalist Certification in Initial Public Offerings

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2006The Impact of Corporate Governance Mechanisms on Value Increase in Leveraged Buyouts 2005Venture Capitalist Certification of IPOs 2021Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions

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