When a PE investment goes public, how does the PE fund exit out of the investment? I know that the IPO itself allows the fund to realize the public market value of their ownership stake in the PC, but obviously they dont dump their stake on the open market the day after IPO. And aren't the IPO shares typically a new issuance diluting ownership as opposed to a public sale of the PE fund's ownership stake? WHat is the timeline for selling their position? How is this determined? ANd logistically, how is this executed?
Any suggested reading would be appreciated as well as any of your personal experiences.
IPO proceeds usually around 20-30% of equity value (LBO IPO's not really any different than any private company that goes public). Generally for LBO'd companies a decent portion of initial IPO proceeds will be used to pay down debt and "right size" capital structure as a public company (if debt load is already manageable than sponsors take cash). Then it's just a series of secondaries over time to monetize full value (eventually when stake b/c manageable and small enough you can just do block sales even)
Ways to Exit a PE Investment? (Originally Posted: 03/15/2011)
Got this question in a recent interview. I know what I said, but I would like to hear some more experienced people give their answer.
What are the different ways to exit a private equity investment?
Thanks in advance
Off the top of my head:
Sale IPO Bankruptcy / Handing over the keys to the lenders / Liquidation Recap all your equity out but keep everyone else's equity in place (as opposed to an outright sale)
CompBanker can you elaborate recapping out your equity? I can't say I've ever seen that. I guess it would basically be like a dividend recap but instead of a dividend it's done as a stock repurchase solely from the sponsor? Would that make sense in a company where management has a large stake, there are co-sponsors, or where there's a significant public float, or what?
You're correct Kenny. Works just like a dividend recap, except the proceeds are used to repurchase shares from a specific equity holder. Makes sense in situations where a coinvestor wants out.
What zsurf said. It doesn't work if the PE shop is the only significant equity holder. However, if you hold a minority share and want out, the other equity holders could essentially re-cap you out of the deal without having to sell the company.
Yes, and if the other holders know you are distressed (as but one example, it's a small stake for your fund and the only remaining active investment in the fund), they will be happy to buy your shares at a discount.
Makes sense, I was thinking it would need to be a minority/joint investment to work as you both pointed out.
The write-off method was extensively used in early 2009 ;)
You could also structure an investment with a put option such that you can force the management or other equity holders to buy you out (this is the same as the recap, only formalized from the get go).
That's an interesting thought; I've actually seen the opposite a few times-entities structuring call options to be able to rid themselves of JV coinvestors/minority stakeholders.
I would imagine a put option has a lot of possibility to create some real mischief if not structured properly though, if for example the other stakeholders wouldn't be able to finance the purchase and the put holder knowingly exercised into a default to grab equity from the other sponsors/owners.
I'm sure there's always gamesmanship when the put option is settled, but I think in the context of most PE deals with a put right feature, the put holder would need to notify the other party at least 6 -12 months in advance. So, that at least gives the counterparty some time to generate the cash.
One of the more recent, high-profile put right battles was between Wachovia/Prudential. Prudential put their remaining stake in the retail brokerage back to Wachovia, which was later assumed by Wells. If I remember correctly, Wells had the right to either settle in cash for one price (lower price), or shares for another (higher price). I think they ended up jamming PRU with a ton of shares because everyone thought the world was ending, cash was too precious to give up and issuing new shares was just another day at work for the big banks.
I know the that's not a PE context, but certainly an example of how you can play games with corporate put rights.
Put Options are very common in Emerging Market deals and are usually created alongside convertible bonds in relatively late stage growth companes that are looking to IPO in 12-18months.
PE Exiting (Originally Posted: 08/24/2012)
At what point would a PE firm exit its investment through an IPO, strategic acquisition or secondary deal?
I'm not sure if it would typically occur when Price/EBITDA reaches a certain level or when some other metric reaches a point where an exit seems profitable?
when they get rich offers from strategics; or when they need some wins to fundraise for the next fund.
When they can no longer create value. Of course, there are a host of other consideration (fiduciary obligation to return capital, initial investment horizon, model outputs, etc), but I think the underlying premise is the former.
Others may be able to answer this question better than me but one thing to always keep in mind is that PE funds have pre-defined life cycle. Let's say we have a PE fund that has a life cycle of 5 years, with the first 2 years dedicated to making investments. At the end of year 5 the fund is expected to liquidate and return money and hopefully capital gains, to the investors. Now suppose we made an investment in year 2, then we would need to realize profits over the next 3 years and exit the investment, unless the GP obtain permission from majority of the LPs to extend the fund life a few years further, in which case it would still need to exit the investment before the end of the new extended deadline. Timeframe is very important when it comes to PE investments and is what differentiate them from HFs (on the other hand HFs tend to do short term investments anyway unless you are Phil Falcone). One has to make sure that not only will the investment pay off at some point but also that the returns should come soon enough for the fund to be able to lock in the gains.
Thanks everyone. I was originally thinking of 1-3 years was the typical lifetime of a PE investment.
If there are any resources or readings out there that could be recommended to me, I`d appreciate it!
I think a lot of the commentary here is a bit misleading. The typical horizon of a PE fund when making an investment is 4-6 years. It is pretty rare to exit before 3 years (typically only when an big offer from a strategic/other fund will let you make a killing). Often you will find worse performing investments are held onto longest, as funds try to turn it around or avoid having to recognise their losses e.g. a lot of funds are still holding onto 06/07 investments that took a hammering.
You are right in pointing out that funds have a lifecycle defined by their legal structure but typically this is not a big constraint - the funds I have seen all have 5 years for investment followed by another 5-7 years to liquidate i.e. 12 years in total.
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