Private Equity Exit Strategies – Navigating the Economic Cycle

The value creation that Private Equity can bring to businesses, by contributing expertise across strategy, M&A and process enhancement is well documented and particularly applicable to PE partnerships with private family or founder owned companies. This value creation comes when growth is accelerated through customer expansion, operational efficiencies are improved, costs are reduced, IT systems are implemented and additional talent is employed.What is possibly more important but less well-documented is the value that is created through the “art of the exit” – being able to determine the right time to sell and identifying the best method of selling a company to maximise investor returns.PE firms typically aim to exit their investments within three to five years, with the timing dependent on the execution of their value creation plans, the current and future expected market conditions and the level of interest from potential buyers. PE funds carefully evaluate these factors, amongst others, when planning their exits in order to maximise investor returns.There are at least three main methods of equity release that Private Equity fund managers consider when planning to exit a business, often years in advance of the actual exit outcome:

1. Initial Public Offering (IPO)
2. Trade Sale
3. Secondary Sale

Across Vantage’s private equity growth funds, trade sales have clearly been the preferred exit avenue for underlying Private Equity managers. However, the attractiveness of each of these strategies as an exit option varies significantly and is largely dependent on economic conditions, which is explored below.

Initial Public Offering (IPO)

Over Vantage’s history, the use of IPOs as an exit route by underlying managers has varied significantly. As demonstrated in the graph below, the 2022 Australian IPO market was, in terms of volume of capital raised, the weakest in recent years with 107 new listings raising $1.1 billion in capital, down from 2021 which saw a significant IPO rush, with 241 listings raising $12.7 billion. Over the past 5 years, the average number of new listings remains on the lower end of that scale, being approximately 140 listings annually.

For Vantage funds, the 14 IPO’s to date (including 6 between 2019 – 2022) have generated the highest returns across the 3 strategies. To date, these exits have generated a 4.7x Multiple on Invested Capital (MoIC), with an average Internal Rate of Return (IRR) of 74% p.a.Empirical data shows IPOs exit valuations being materially higher than other forms of exit. A seller can often achieve an optimal pricing outcome by removing the discount that is typically applied to unlisted business valuations.Despite this, there are various drawbacks to IPOs as an exit route, which makes it increasingly difficult to use as a preferred avenue for PE managers. Most notably, IPOs require strong, favourable market conditions to be successful (the “IPO window is open”). Market volatility or a shift in market sentiment can result in a reduced investor appetite for new listings, impeding the fundraising process, often leading to delays or sometimes the cancellation of an IPO. In addition, due to regulatory constraints, IPOs rarely allow for a complete exit of all shares held, at listing. Generally, the PE fund will be required to retain a certain percentage of their shares for a fixed period, which both delays their ability to distribute returns to investors and introduces public market risk, which is not desirable for PE investors.Trade Sale

Trade sales are the most common exit route for Vantage investee funds. They are typically defined as a sale to another company (which is either listed or unlisted) and often already operating within the same or a similar industry sector. Generally, the acquirer is a business seeking to expand their existing operations to new geographic regions or looking to add to their existing product or services offerings or otherwise seeking to grow their revenue and earnings to ultimately increase the value of their shares.To date, the 45 trade sales completed across Vantage’s portfolios have generated an average IRR of 58% p.a. delivering an average 2.65x MoIC. Trade sales often provide a 100% exit for portfolio company and provide Vantage’s funds with strong and consistent returns, even during uncertain macroeconomic environments, making them a resilient route for exit.Trade sales provide an array of advantages which support ease of exit and enhance returns to investors.

• Potential for a high return on investment: Trade sales can provide synergies to the acquirer’s business. Strategic buyers are often willing to pay a premium that other exit methods do not offer, due to the synergies and cost savings that can be achieved through the acquisition. In addition, if the target is an in-demand company, this can often lead to a competitive sale process which can drive up valuations, resulting in higher investment returns to the PE funds and their investors.
• Faster exit: A trade sale can be completed more quickly than an IPO or a secondary buyout, which can be an advantage for private equity funds looking to exit their investment within a certain timeframe. Faster exits also means accelerated distributions to investors; and
• Reduced risk: Trade sales reduce the risk of holding onto the portfolio company for longer than desired. Private equity firms face a risk of declining returns or even loss if they hold onto the investment for too long.

Secondary Sales