"a good chunk of the risk is already out of the deal"
According to the proclaimed outlook of most PE players, the risk wouldn't have changed at all: what the deal will bring now versus what it may bring later. House money and sunk costs are the sort of mental accounting they are supposed to eschew.

"Buying (in the IPO) when so many smart people are selling is rarely a good idea" is a sentiment that applies to all such dearly-beloved exits, PE and VC. Caveat emptor!

Interesting points on the fundamentals (gas prices and car prices).

Mmmm, not quite Paul. The IRR on any deal can be juiced up phenomenally if the exit is effected as soon as possible relative to the investment date. Play around with the XIRR function in Excel and you'll see that the impact of a quick flip can produce outstanding IRRs relative to holding.

Now, private equity firms are after two things: high IRRs that they can promote in their offering documents, and large absolute gains (because their 20% promote is based off the latter).

In this case, it seems the private equity firms are going for the high IRR, which is not untypical for firms to do, especially when they are raising a new fund.

To connect the dots, let's suppose a $2 bn investment. The "quick flip" route is a 9-month $3 bn return. The hold 'em strategy is to hold on to the asset for four years. What nominal return is required to equal the IRR of the quick flip strategy in this second case?

Because of the magic of compound interest, which in this case works against the private equity firm, the "long-term hold" strategy would require a $17.5 bn exit in four years to achieve the same IRR (about 72%).

Hertz is about a $15 bn TEV company all told, so this would require a doubling of valuing in 4 years, or 19% CAGR in valuation. (As compared to the slight financial engineering that has apparently enabled them to increase the value by $1bn in 9 months.)

So the rational private equity firm, seeking to maximize IRR (at the expense, of course, of a large absolute gain) would prefer the quick flip strategy to the long-term hold unless they thought the risk-adjusted probability of Hertz doubling in value of 4 years exceeded the value of taking their money off the table now.

Thus, I think this deal speaks more to the incentives faced by private equity firms rather than the investment potential, and implicit signalling in such a quick sell, that you propose.

Marc -- I don't disagree, but then again, I'm well aware of how the IRR game works (and I've played it myself).

That said, while you can explain the early Hertz IPO by IRR-gaming in pursuit of a new fund raising, I'm hard pressed to believe that CD&R really needs to trick up an exit at Hertz just so that it can raise a new fund.

Matter of fact, given CD&R's investment record and rep, you can much more compellingly make the opposite argument, that there is no rational reason for CD&R to be flipping something for short-term IRR. It has enough brand, performance, etc., that when it doesn't go for cash-on-cash returns there must be something interesting going on.

Of course everything Marc points out is correct, but he ignores the fact that most sophisticated LPs are getting more than a little disenchanted with the quick flip and its (often) lower multiples. All that cash coming back has to go somewhere and right now its usually going back into a public market that no one's happy with.

You can't spend IRRs.