When Do Managers Seek Private Equity Backing in Public-to-Private Transactions?

Over the last decade, the going private market has experienced a considerable boom in size and also has become more interesting for private equity investors that are looking to partner with incumbent management. This offers managers the choice to take the firm private themselves in a traditional management buyout or to seek private equity backing. We propose that managers decide for a management buyout without any involvement of private equity in case they are less financially constrained: when their firms are undervalued, have high cash levels, are smaller and less financially visible, and the managers own a large toehold. In contrast, managers invite participation of private equity investors when they cannot complete the deal themselves: in firms that are larger, have less cash and managers own a smaller fraction of the firm. Our analysis on a sample of UK public-to-private transactions completed over the period 1997-2003 provides results that are in line with these predictions.