A private equity company generally receives the large majority of its returns on an investment upon exit of the investment, and as such the exit is an important part of the life-cycle of a private equity transaction. The most commonly used methods available to private equity investors to exit their investments are described below:
Initial public offering (IPO)
Under an IPO, the shares of the investment are listed on a stock market and sold to the public. In most IPOs, the private equity company exits the investment by selling its shares in the market after the shares are listed. This exposes the returns on the investment to share price fluctuations.
Under a trade sale, the private equity company sells all of its shares of the investment to a third party often operating in the same industry as the company itself (i.e., strategic buyers). This exit method permits a private equity company to exit the investment completely and immediately upon the closing of the sale.
In a secondary buyout, the private equity company sells its investment to another private equity company. A private equity company may want to proceed with this exit method if it is looking to shorten the life-time of the investment or it is not able or willing to finance the investment any further but the investment is not at a suitable stage for an IPO or trade sale. There may be other reasons for a private equity company to utilize this exit method, which, like a trade sale, permits a private equity company to exit the investment completely and immediately upon the closing of the exit transaction.
In a leveraged recapitalization scenario, the private equity company will re-leverage the investment. One method of completing a leveraged recapitalization is for the company to raise money by borrowing money from a bank or issuing debt securities and using the money to repurchase its shares from the private equity company. Under this exit method, the investment is able to extract cash from, while retaining an interest in, the investment.
According to a recent report entitled Mass Exodus – Private equity exits in 2015 of Toppan Vite, in partnership with MergerMarket, the outlook for IPO’s as a private equity exit method is uncertain in light of current economic conditions, which are causing uncertainty in the equity markets. Private equity firms that wish to use this as an exit method will need to wait for the economic outlook to stabilize.
In addition, according to the report, certain industry experts believe that the high exit volumes and values in recent times have been fuelled, in part, by low interest rates and robust debt markets, which provide capital for strategic buyers. One industry expert believes that so long as the lending window stays open, trade sales will continue to be high.
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