How to Exit Like a Pro: Private Equity Strategies for Maximizing Returns

How to Exit Like a Pro: Private Equity Strategies for Maximizing Returns

key takeaways:

  • Exit planning is a crucial part of the PE investment process, as it can significantly affect the final return on investment.
  • PE investors have several exit options to choose from, such as IPOs, strategic acquisitions, or secondary buyouts, depending on the market conditions, the characteristics of their assets, and their return expectations.

Private equity (PE) investors are always looking for ways to increase the value of their portfolio companies and generate attractive returns for their stakeholders. But how do they ensure a successful exit that reflects the true potential of their assets? What are the best practices and strategies for preparing, executing, and communicating a compelling exit story?

In this article, we will explore some of the key aspects of PE exit planning and execution, drawing on insights from industry experts and real-world examples. 

The Importance of Exit Planning

Exit planning is a crucial part of the PE investment process, as it can significantly affect the final return on investment. A poorly planned or executed exit can turn a good deal into a mediocre one, or even derail the whole process. Therefore, PE investors should start thinking about their exit strategy from the very beginning of their ownership period, and align their business and exit objectives throughout the asset journey.

According to McKinsey, PE investors should perform a readiness scan 18 months before the intended time of exit, and identify the key value drivers, risks, and opportunities for their assets. They should also develop a clear and evidence-backed equity story that articulates why their assets are attractive, how they will improve, and why they are strategically beneficial for potential buyers.

The Main Exit Options

PE investors have several exit options to choose from, depending on the market conditions, the characteristics of their assets, and their return expectations. The main exit options are:

  • Initial public offering (IPO): This involves listing the company on a public stock exchange and selling shares to the public. This option can provide access to a large pool of capital and liquidity, as well as enhance the company’s reputation and visibility. However, IPOs are also costly, time-consuming, and subject to market volatility and regulatory scrutiny. Moreover, IPOs usually do not allow PE investors to fully exit their stakes, as they often have to retain some shares for a lock-up period.
  • Strategic acquisition: This involves selling the company to another company, usually in the same or a related industry, that can benefit from synergies, economies of scale, or market expansion. This option can offer a high valuation and a quick exit, as well as potential tax advantages. However, strategic acquisitions also entail finding the right buyer, negotiating the terms, and dealing with integration issues and cultural differences. Furthermore, strategic acquisitions may face antitrust or other regulatory hurdles, especially for large or dominant players.
  • Secondary buyout: This involves selling the company to another PE firm, which may have a different value proposition, holding period, or exit strategy. This option can provide a fast and flexible exit, as well as a competitive valuation, as PE firms tend to have a deep understanding of the industry and the company. However, secondary buyouts also involve paying fees to intermediaries, sharing confidential information with competitors, and potentially leaving some value on the table for the next owner.

The Key Success Factors

Regardless of the exit option, PE investors should aim to maximize the value of their assets and minimize the risks and uncertainties that may affect the exit process. Some of the key success factors for achieving exit excellence are:

  • Focus on value-adding performance improvements: PE investors should instruct their management teams to implement initiatives that can enhance the company’s growth, profitability, and cash flow, while preparing for the exit and post-transition stages. These initiatives may include expanding into new markets or segments, launching new products or services, improving operational efficiency or customer satisfaction, or optimizing the capital structure or working capital. PE investors should also leave some value-creation opportunities for the potential buyers to execute, as this can increase their interest and willingness to pay.
  • Prepare to disclose and manage unpleasant surprises: PE investors should be transparent and proactive about any issues or challenges that may affect the company’s performance or valuation, such as litigation, regulatory changes, customer concentration, or environmental, social, and governance (ESG) factors. They should also have a plan to mitigate or resolve these issues, or at least explain how they are factored into the price. PE investors should also anticipate and address the difficult questions that buyers may have, such as the sustainability of the company’s competitive advantage, the impact of technological disruption, or the quality of the management team.
  • Tailor the messaging and communication: PE investors should craft a compelling and consistent equity story that showcases the company’s strengths, opportunities, and strategic fit for the target buyers. They should also use various channels and formats to communicate their story, such as teasers, information memoranda, management presentations, or data rooms. PE investors should also customize their messaging and communication according to the preferences and expectations of different types of buyers, such as strategic acquirers, PE firms, or public investors.

Real-World Examples

To illustrate how PE investors can apply these principles and strategies in practice, let us look at some real-world examples of successful PE exits:

  • GlobalLogic: In 2021, Tokyo-based Hitachi acquired GlobalLogic, a Noida-US-based digital engineering services company, for $9 billion. The PE sellers were Partners Group and CPP Investments, which had invested in GlobalLogic in 2017 and 2018, respectively. 
    • The deal represented a 20x EBITDA multiple and a 4x return on investment for the PE sellers. The PE sellers had helped GlobalLogic grow its revenue, expand its global presence, and enhance its capabilities in cloud, IoT, and AI. They had also prepared a strong exit story that highlighted GlobalLogic’s value proposition as a leader in digital transformation and innovation, and its strategic fit for Hitachi’s vision of becoming a global leader in social innovation.
  • Paytm: In 2021, India’s largest fintech company, Paytm, went public in a $2.5 billion IPO, the largest in the country’s history. The PE sellers included Alibaba, SoftBank, Ant Group, and Berkshire Hathaway, which had invested in Paytm over the years. 
    • The IPO valued Paytm at $18 billion, and allowed the PE sellers to partially exit their stakes and realize some gains. The PE sellers had supported Paytm’s growth and diversification into various segments, such as payments, e-commerce, gaming, and insurance. They had also helped Paytm craft a compelling IPO story that showcased its market leadership, strong brand, loyal customer base, and huge growth potential in India’s digital economy.

To wrap up, PE exit planning and execution are critical for maximizing returns and achieving exit excellence. PE investors should start preparing for their exit from day one, and align their business and exit objectives throughout the asset journey. They should also choose the best exit option for their assets, and focus on value-adding performance improvements, transparent and proactive risk management, and tailored and consistent messaging and communication. By following these best practices and strategies, PE investors can increase the value of their assets, attract the right buyers, and negotiate the best terms for their exit.