Private Equity Investment Exit Strategies

Private equity firms are in the business to make a profit. This means that, at some point, private equity firms and investors will back out from some portfolio companies in order to actualize their profit and set the company in motion for independence, profitability, and growth. In order to get returns on their investments, private equity companies usually adopt different types of exit strategies. Exit strategies refer to the methods or means that private equity firms adopt to liquidate their investment in the portfolio company. The private equity investor or firm can either decide to initiate a secondary sale, an initial public offer (IPO), a trade sale, or management buyouts (MBOs). In instances where the private equity firm is unable to implement an exit strategy due to market volatility or economic crunches, it might be forced to lower its liquidity or hold on to the investment until profits are recorded.

Trade sales or strategic acquisition is one of several exit strategies that private equity firms adopt. The trade sale strategy involves selling the portfolio company to another interested company. This interested company or individual might then develop the portfolio company as its own business. For instance, a private equity firm might decide to sell its stake in a portfolio company that provides micro-insurance policies to low-income households to an established traditional insurance company. This exit strategy is one of the most commonly adopted private equity investments, considering it is used by approximately 50 percent of investors in the private equity space. 

Another commonly adopted exit strategy by private equity firms or investors is the secondary buyout. With a secondary buyout, the private equity investor sells their stake in the company to another willing private equity investor, which means that the company remains a private equity investment. After acquiring the investment, the buyer also makes deliberate attempts to make contributions that will add value to the investment. The buyer might also decide to make changes or reforms to the processes and organizational structures within the portfolio company.

With an initial public offering or IPO, a private company is listed on the stock exchange so the public can acquire stakes in the company. When the company becomes publicly listed, it is no longer private and within the scope of private equity investors except when it gets delisted. Before a private equity investor publicly lists the portfolio company on the stock exchange, they have to observe strict regulatory compliance processes and approval from the Securities and Exchange Commission or SEC. First, a valuation team has to decide the proposed value of the company on the stock exchange. The team then concludes on the company’s price per share on the stock exchange. Upon presenting the necessary documentation and subsequent SEC approval, the portfolio company becomes publicly listed. 

Private equity companies might also give up their stake in a portfolio company through a partial exit. As the name implies, the private equity investor sells off a part of its investment through a secondary sale. With this method, the investor can yield partial returns on the investment while still being involved in its administrative and operational direction.

Finally, earn-out is an exit strategy where the private equity investor receives additional revenue based on how well the portfolio company performs in the future. This type of exit strategy ensures that the seller contributes to the growth and success of the investment company even after the sale.