An Overview Of Private Equity Exit Options

By Author: David P Colney
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Evolution and productivity are considered as the main objectives for goals of private equity (PE) industry. An exit plan is a prospect strategy that is gained by the investors to relive a position in a monetary advantage or dispose of palpable commercial assets prearranged basis for either has been met or exceeded.

Private equity investors, at the time of entrance, must be very clear about their private equity exit strategies decisions. The exit plans resemble that markets had started giving signs of achieving maturity, however the slowdown in the economy coupled with rising liquidity concerns has triggered a spurt among PE investors looking for alternative exit options.

The private equity exit options can be taken for the requirement of exiting a non-performing investment or finishing up a business, which has no potential to grab profits. In this place, the reason of the exit plan is to limit losses. According to a PitchBook data, in Q3 2022, the US private equity market closed a total of USD 280.64 billion in deals, a YoY decline of 20.4 percent.

In this article, let’s understand about the essential ...
... common modes of exit and important considerations as well as trends that are required for a private equity deal structure followed by the preferred exit options, typically considered by PE investors.

Modes of Exit

Exits are of central criteria to PE investors and they consider a range of various private equity deals exit strategies to know their Return on Investment (ROI). A few of the highly common PE exit strategies are as follows:

Initial Public Offering (IPO)

The profits of an Initial Public Offering (IPO) are ostensible is advanced valuation can be grabbed as the markets are buoyant, administration will cooperate since they can remain in operative control and the investor will get option to choose the advantage from a longer term shareholding in the organization. As the valuation is dependent on prevailing market conditions, volatility in public markets has dampened a few PE-related public offerings, but exits through public markets continue to remain lucrative for PE investors.

Sale of Enterprise to another Company

In the private equity exit strategies one can recover the investments made in the investee organization by selling the holdings to an outsider company that is interested in buying the entire enterprise from the entrepreneur. Investors can also recuperate their investments in the investee organization by hawking the holdings to outcast who is attracted in purchasing the entire company from the entrepreneur.

Trade Sale and Third Party Sale

Trade Sale as well as Third Party Sale is considered as the main driver for enhancing the interest of private equity deal structure in 'control-deals' for their capability to get their investment horizon as well as their chosen mode of exit, independent of promoter intervention. Though IPO remains the most chosen mode for exits by many PE investors.

Liquidation of the Investee Company

If the investee corporation does not become profitable and grieves losses, the private equity exit options will recover the investment by the process of negotiation or settlement with the businessperson. Failing which the salvage takes place by means of winding up of the company through the court.

Dual-track Process

PE firms usually utilise a 'dual-track process' to exit their investments. In simple terms, filing a prospectus for IPO and simultaneously exploring other ways for a secondary sale. Dual-track process gives the PE investors an opportunity to test the water in the public market, while seeking for a suitable strategic purchaser.

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Considerations and Trends

Deal-cracking in the present, turbulent economy usually gives a unique opportunity for PE investors. The high inflation, growing rate of interest and risks related to recession has given rise to an atmosphere where pessimism permeates in several areas of the economy. But many aspects in the present environment usually favor private equity deals. It is important to know the most impactful considerations and trends that pay attention to the patterns, key issues, and relevant events, which have affected PE industry.

Preparing the Portfolio Enterprise for Sale

PE investors mainly as they approach their investment horizon gets a regular tab on the performance of the enterprise and are involved in strategic decisions that may impact valuation. Further, as part of the 'clean-up' of a portfolio enterprise before its impending sale, another emerging trend is to refinance or repay the existing debt of the enterprise.

Partial Exit

Retaining a greater stake or control rights of a listed enterprise may also expose the PE investor to the risk of being categorized as a promoter or 'co-promoter'. Partial exits from private enterprises happens with the risk of the PE investor unable to uphold the driver's seat and piggybacking on the private equity exit strategies chosen by the founders/promoters of such enterprises.

Severance Pay-outs or Compensation Arrangements

A PE investor, as part of its private equity exit options from a listed organization, cannot enter into compensation or profit-sharing arrangements, which include arrangements for severance pay-outs with the promoters, directors or essential employees, to incentivise them by sharing returns beyond a hurdle rate, without the approval of the board and non-interested public shareholders.

In conclusion, understanding the diverse exit options available in the private equity sector is crucial for investors seeking to optimize their returns. From initial public offerings (IPOs) to trade sales and secondary buyouts, each option comes with its own set of strategies and considerations. By carefully evaluating these choices and implementing effective exit strategies, investors can navigate the landscape successfully and maximize their investments in private equity.

He is a professional writer who curates articles for a variety of online publications. He has extensive experience writing on a diverse range of topics including business, education, finance