In this article we discuss various exit strategies that is available and how the management takes a call on choosing the appropriate exit strategy.
Initial Public Offering
This is one of the most popular methods of exit used by private equity investors, as this method is likely to provide the investors with the highest return on investment, in markets which are conducive to growth. In an IPO listing the investor is able to sell its shares to the public, as the company’s shares get listed on the stock market. Going public is an attractive mode of exit but it comes at the cost of complying with strict regulatory requirements. Further, the investor looking to exit route will be exposed to market risks and fluctuations for a certain period of time post the IPO.
In an acquisition by a strategic buyer, a company purchases the business either in cash or stock or both. A strategic buyer identifies a good fit that helps it enter new markets and enhance its existing business capabilities. The benefit of this transaction is that the PE investor can get a complete exit and an immediate access to liquidity .However, the management may lose the freedom of controlling the operations that it had enjoyed prior to the acquisition.
A management buy-out (MBO) is a type of acquisition in which the company is acquired by the company’s own management and executives. Company could be acquired by using the combination of debt and private equity investment. Generally, managers are rarely wealthy enough to buy the company using their own equity therefore they raise funds through debt financing. MBO’s therefore often takes the form of a leveraged buyout (LBO). This exit strategy provides immediate liquidity and changes ownership.
Leveraged Recapitalization is a partial exit strategy in which a company restructures its capital structure by raising significant additional debt with the purpose of either paying a large dividend or repurchasing shares. With this strategy, shareholders can remain in control and use the possible tax benefits of additional debt of the company. However the additional debt raises the concern of over leveraging which could lead to financial difficulties and even bankruptcy. This technique can also be used as a shark repellent to hostile takeovers.
To conclude, an exit strategy is a vital part of the deal life cycle for the PE investor. It should be of paramount importance to get the right type of exit in order to maximize the return on investment for the stakeholders and limited partners. Some factors to be considered while choosing the appropriate exit route include; considering the investors future role in the business, assessing the liquidity needs, considering the impact of regulatory requirements like Sarbanes-Oxley and last but not the least, taking measure of the market conditions at the time of liquidity event.
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