Exit Strategies for Private Equity Investors

In the world of investments, private equity refers to the investments that some investors and private equity firms directly make into a business. Private equity investments are mostly made by institutional investors in the form of venture capital funding or as leveraged buyout. Private equity can be used for many purposes such as to invest in upgrading technology, expansion of the business, to acquire another business, or even to revive a failing business.

Private equity investors usually have an investment horizon of 5-7 years and plan to exit after that after making a substantial profit on their investment. There are many exit strategies that private equity investors can use to offload their investment.

The main options are discussed below:

Initial Public Offer (IPO)

One of the common ways is to come out with a public offer of the company, and sell their own shares as a part of the IPO to the public. As the case may be, you may sell your share immediately, or sell the shares allotted to you after the company gets listed and the shares start trading on the exchange. Stock market flotation can be used only for very large companies and it should be viable for the business because of the costs involved.

Strategic Acquisition

Another alternative is strategic acquisition or trade sale, where the company you have invested in is sold to another suitable company, and then you take your share from the sale value. This is one of the most popular exit routes for private equity funds. The buyer will usually have a strategic advantage in acquiring this business as they both may complement each other. For this reason, the buyer will often pay a premium to acquire such a business.

Secondary Sale

In a secondary sale, the private investors will sell their stake in the business to another private equity firm. This can happen for many reasons, for example, the business may require more money which is not in the capacity of the current equity fund. Or, the business may have reached a stage that the existing private equity investors wanted it to reach and other equity investors want to take over from here.

Repurchase by the Promoters

This is also a successfully used exit strategy, where the management or the promoters of the company buy back the equity stake from the private investors. This is an attractive exit option for both the investors and the management.

Liquidation

This is the least favorable option but sometimes will have to be used if the promoters of the company and the investors have not been able to successfully run the business.