Private Equity Exit Options

Private Equity Exit Options

Gavin Ryan

25 years: Private equity & banking

In order to have a sustainable business, a fund manager needs to periodically raise a new fund; and in order to do this he needs successful exits. Gavin describes the four exit options and the benefits of each.

In order to have a sustainable business, a fund manager needs to periodically raise a new fund; and in order to do this he needs successful exits. Gavin describes the four exit options and the benefits of each.

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Private Equity Exit Options

11 mins 28 secs

Overview

Having an exit as a required component of investment strategy, is one characteristic of private equity investment which makes it unique as an asset class. The four exit options available are trade sale, stock market exit, sale to another fund or financial sponsor and sale back to the company or shareholders. “Grooming for exit” is achieved by keeping an eye on what the required profile of the company needs to be by exit time; and working towards this.

Key learning objectives:

  • Outline the features of the four exit options

  • Understand how grooming for exit is achieved

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Summary

What are the four exit options?

  1. Trade Sale
    • The trade sale is where the private equity investor sells to a company operating in the same or a related sector to the portfolio company. The acquiror typically is interested in buying the portfolio company once it has acquired a certain level of maturity, a critical market mass and a proper management structure.
  2. Stock Market
    • The second exit method is through a stock market exit, via an Initial Public Offering or some form of private placement, which requires the involvement of an underwriter.
  3. Sale to another fund or financial sponsor
    • The third exit type is the sale to another private equity fund or financial type investor, a route that has developed very much over the last ten years.
  4. Structure Exit  
    • The fourth exit route is a structured exit, in which the fund sells its shares to the other shareholders or the company.  Typically a mechanism such as a put option would be used and it would most likely involve the company leveraging itself to raise the money to buy out the private equity investor.

How is grooming for exit achieved?

When structuring a deal, the private equity investor will make use of investment instruments which make the investment easier to exit. The most important of these is the drag along and tag along right. This right allows the private equity investor, who may even have a minority stake, to effectively offer a potential buyer a majority or even one hundred percent stake. This will have the effect of increasing the universe of potential buyers.

When grooming for exit it should be borne in mind that the company profile may need to be a bit different for a trade sale than, for example, an IPO.  The elements that will go into the profile will be the metrics that drive the valuation at exit, like EBITDA or number of subscribers; the profile of the management team, the level of corporate governance, whether there are acquisition opportunities for the company post exit.

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Expert
Gavin Ryan

Gavin Ryan

Gavin Ryan has twenty years’ experience as a private equity fund manager. He has managed a $30m Advent International Affiliate Fund, a $200m Fund part of Soros Fund Management and a €2.5bn Green Energy Asset Manager. Before he was in investment banking with HSBC and Nomura. Gavin has an Engineering Degree from Cambridge and an MBA from McGill.

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