When should venture capitalists exit their investee companies?
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 23 September 2013
Abstract
Purpose
Exit strategies are critical for external private equity holders, such as venture capitalists and business angels, to receive investment returns successfully. The paper models the exit decision as a fixed date with the option to exit early, and develop an approach to help private equity holders determine an optimal early exit region based on a target equity value and the time remaining.
Design/methodology/approach
The paper sets up a continuous time model to derive analytical solutions and apply simulations to numerical examples in this study.
Findings
By numerically analyzing the nature of the solution the paper illustrates that a higher return drift of the investee company, a lower return volatility of the investee company, and a higher target return of the private equity holder results a smaller early exit region.
Originality/value
This study helps determine the optimal time of stopping investments, and provides venture capitalists with a usable way to make exit decisions.
Keywords
Acknowledgements
This study was partially sponsored by Hong Kong Research Grants Council (RGC) Grant #524109 for Li and Wu, by Canada Research Chair Grant #950-226325 for Wu, and by National University of Singapore Researc Grant R-146-000-059-112 for Li and Tan.
Citation
Li, X., Huat Tan, H., Wilson, C. and Wu, Z. (2013), "When should venture capitalists exit their investee companies?", International Journal of Managerial Finance, Vol. 9 No. 4, pp. 351-364. https://doi.org/10.1108/IJMF-01-2013-0003
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited