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Exit Strategies for PE Investors


For private equity investors, one of the most important considerations for a successful investment is determining the value the firm will receive at exit, which directly impacts fund returns. Private equity investors often have a 5 to 7-year investment horizon and expect a significant return at the end of this hold period. During this period, firms will help the acquired company create value in a variety of ways, including operational improvements, significant restructuring, and other value-added contributions to grow the company.


There are several ways a private equity firm can exit an investment; each method has its own merits and one may make more sense for certain types of firms or investments over others. In this article, we will describe a few of the common exit strategies in detail and what considerations a private equity firm as well as the target company typically considers when determining the optimal exit strategy. While there is no one-size-fits-all approach to exit strategies, the three types below are typically the most common across US private equity firms.


Initial Public Offering (IPO)

One way to exit an investment involves taking the company public through an initial public offering (IPO). An IPO involves offering shares of a privately held company to the public in a new stock issuance. The process itself requires regulatory filings, a roadshow to preview the IPO with potential investors, and several other processes that will be conducted by bankers running the process.


The IPO provides PE investors with an opportunity to sell their stake in the company either immediately during the IPO or gradually afterward. Some of the other positives of an IPO exit include the potential for higher valuations (as public markets might offer a higher valuation than a sale to another private entity) and liquidity (as the PE firm can convert existing shares into cash). For the company itself, an IPO is attractive for enhancing its brand and recognition, compensating employees with large payouts and incentivizing them to stay and create more value for the company as part of go-forward compensation packages, and raising capital for the company to pursue future growth initiatives.


An IPO might not be the appropriate exit strategy if a PE firm has limited resources, as it can be expensive to hire bankers, lawyers, and other advisors and time-consuming since it can take several months or years to complete the whole process. For the company itself, going public would mean regulatory and reporting requirements, potential pressure on stock prices, and disclosures on company activities that were not previously required as a private entity. If this is not desirable for the company, then an IPO would not be the best way to exit PE ownership.


Strategic Acquisition

Another common exit strategy is when a PE firm chooses to sell the target company to a strategic buyer, meaning a company within the same or similar industry that the target company operates in. The strategic buyer will profit from this transaction because their strengths may complement those of the target company, creating an even stronger company from the combination of the two. As a result, a strategic buyer will typically be willing to pay a premium for these potential synergies, which would result in a higher exit value for a PE firm than perhaps selling to another PE firm (i.e. the secondary buyout described in more detail below).


In a strategic acquisition, the PE firm has the potential to benefit from premium pricing, as mentioned above, but also enjoys more certainty, efficiency, and a shorter timeline than an IPO process. Also, selling to a strategic buyer means there is less of a need for public disclosure; often, PE firms are not required to disclose the size of the transaction or even other advisors involved in the process. Lastly, strategic acquisition can make a lot of sense for the target company itself, as the strategic buyer is familiar with their industry and can therefore realize synergies and provide more value to the overall company.


A strategic acquisition may not be the ideal exit strategy for the company if it would like to maintain control, as the buyer will likely have the majority of influence over management and operational changes. Furthermore, there may be challenges to realizing potential synergies, and therefore there will be limited upside for growth. For the PE firm, negotiating with a strategic buyer might mean dealing with exclusivity, which limits negotiations to only talking to this one party and not gathering offers from other parties, and the negotiations themselves might be complex and therefore expensive. Lastly, if the combined companies are large in size or influence, they may face regulatory or antitrust hurdles, which is an added layer of complexity and delay in the closing timeline for the deal.

Secondary Buyout

In a secondary buyout, a PE firm sells the target company to another private equity firm. This can be an attractive option if the selling PE firm believes it has maximized its value-add for the company or has reached the end of its typical hold period, and another PE firm sees additional value to be created through another round of private ownership. At the PE firm I work at, this is the most common exit strategy for us, and we run an analysis to determine the typical return of a secondary buyer based on the long-term growth trajectory of the company after our ownership period. This helps us generate a better estimate of how much this buyer would be willing to pay for the company at our exit.


Secondary buyouts are attractive because they are a defined, clean exit path and allow flexibility for both PE firms, as negotiations are between peers rather than companies with potentially different goals (as is the case with a strategic acquisition). For the target company, continued private ownership can be more of a seamless transition, and the new PE firm can provide much-needed growth capital to the company.


A secondary buyout may not be the best option for the company if they have major strategic plans that could be disrupted by an ownership change or uncertainty with management positions that could hurt the company’s performance. PE firms may choose not to pursue this exit route if they believe there is still significant upside to the investment, perhaps instead choosing to reinvest through another fund in the firm or marketing the company to the public instead.


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