Are Sales Set to Replace IPO’s as Private Equity’s Preferred Exit Strategy?


April 24, 2014

Whenever a private equity (PE) investor or firm looks at performing a buyout, merger, or acquisition, there is always a focus on the longer-term and specifically on the potential exit strategy at the end of a specified holding period.


This is true whether a PE firm buys a strong, high performing business or takes something of a gamble on one that has a less secure future.


According to a report on the Financial News website, PE investors are starting to look again at the potential to be had from selling the businesses they are looking to exit, either to another PE firm or to another business within the same trade and industry. This goes against the most recent trend within the finance industry, which has seen many PE firms exiting by exploring the IPO route.


It has been reported previously by numerous sources, including here by The Manila Times, that IPOs would be the biggest exit strategy undertaken in 2014. With the first third of the year bringing market uncertainty, the appeal of a straight sale is once again starting to emerge.


That is not to say that IPOs won’t continue to be a viable option, but they may not be the immediate primary thought as has been the case previously.


Gorden Milne of international law firm Allen & Overy told Financial News, “People are becoming slightly unsettled by the IPO market. Depending on where they are at in the process they will say ‘rather than spend all that time and money on that process maybe we should just look at a quick trade sale’.”


When Did IPOs Get Strong?
Late 2013 saw a surge in IPO activity. Many PE firms sitting on their dry powder supported this trend; the merger & acquisition (M&A) market went largely quiet from late summer 2013 onwards. Nervous board members were also a factor in this, both from the buying and the selling side of the equation. However, with many large businesses that would be interested in looking at M&A’s growing their cash reserves over the last six months, they no longer necessarily need to go down the IPO route in order to have the security this approach provides.


Trade Sale or PE Sale?
The trend that will most likely emerge in the next six months will be that of trade sales. This will be down to potential PE buyers understanding that the existing owner is probably selling at maximum value. It would be risky for a PE house to take on a business – irrespective of its operations and trading performance – from another PE firm when there are plenty of alternatives out there that could be bought and sold later for a highly profitable return.


PE firms are also mindful of the difficulties an IPO can present in terms of making a full exit from a business or investment, as they often end up still owning a portion of the business or at least having to employ an advisor to sit on the board, which is not the outcome they are looking for.

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