Do Private Equity Investors Take Firms Private for Different Reasons?

In recent years, the going private market experienced considerable boom in size and also became more interesting for private equity investors. This paper shows that the pool of going private transactions is heterogeneous. In fact, private equity backed going private transactions are considerably different versus the traditional management sponsored deals without any private equity backing. In our sample of 214 UK going private transactions completed in the period 1997-2003, we show that these two groups of going private firms are heterogeneous in four respects. First, the Jensen’s free cash flow hypothesis seems to apply for the management sponsored deals that have more cash at hand. In contrast, private equity backed deals seem to have shortage of cash and pay high dividends. Second, the two types of deals are heterogeneous in ownership structure. The private equity backed deals seem to have higher ownership by financial institutions and their ownership is less concentrated. Third, it is only the management sponsored deals that suffer low visibility as their stock’s liquidity and analyst coverage are low. Finally, even though both types of deals suffer market undervaluation, the miss-pricing is larger for the management sponsored deals.