How does a PE exit if there is a lock-up period?
Let's say a private equity can't exit an investment due to lock up. But they are satisfied with the return so far. What are their options? I remember something to do with convertible and options. But i don't understand it completely. Thanks
One way is to look at offloading their ownership in the secondary market. Various banks and advisory firms handle this and it tends to be pretty complex and carries a pretty heavy fee. How they are offloaded can vary widely.
Just brainstorming, you could lock in your return by purchasing put options or other off-market insurance products on the stock.
For megafunds, the only real way to exit is to exit the investment, but they aren't usually subject to those kinds of requirements because they will take a controlling position.
For mid size and smaller funds, that may have a minirity position and would then be subject to some of those requirements, there are multiple options. (1) total return swap on the underlying asset, (2) selling in the secondary market as stated above, (3) creating an SPV where the assets are effectively transferred from the fund, the SPV is levered releasing cash flow, and then held until normal exit options arise, (4) etc.
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