Exit Strategies in overleveraged Private Equity: navigating the ideal financial structure and optimal market frameworks

Abstract

This study aims to scrutinize the intricacies of exit strategies within Private Equity funds, with a particular emphasis on buyout and distressed funds. Overleveraging, characterized by an excessive reliance on debt in corporate acquisitions, is a prevalent practice in the private equity buyout fund sector. Fund managers often employ this strategy to achieve higher returns with lower equity portions and to leverage the advantages of tax shields. However, this financial approach presents diverse challenges, particularly in aligning with ideal market conditions, predominantly influenced by prevailing interest rates.

The comprehensive analysis of overleveraging's impacts on exit strategies will center on identifying and assessing the optimal financial structure and the appropriate market timing that private equity-backed firms must navigate. This examination considers the risks associated with interest rate hikes implemented by central banks and aims to identify the ideal exit strategy for buyout funds, capable of mitigating distress threats to portfolio companies.