April 30, 2018

Private Equity: Dual Track Exit Strategies

In many instances, private equity sponsors may pursue a potential IPO by a portfolio company while at the same time exploring that company’s possible sale. This PwC blog discusses the considerations that sponsors should keep in mind when pursuing this dual-track exit strategy.

The blog points out firms may choose to be proactive or reactive in their approach to a dual-track strategy— either openly pursuing willing buyers while moving closer to an IPO, or only considering purchase offers they receive. This excerpt discusses the factors that might cause a sponsor to adopt a more proactive approach:

– Market volatility – When market volatility is high, PE firms may want to adopt a proactive strategy, actively pursuing potential buyers in an attempt to reach an exit price within a more predictable range. It should be noted that high market volatility inherently also provides additional uncertainty around the completion of a successful IPO and/or sale.

– Holding period – In an IPO, the PE firm must retain a significant stake in the company, which would prolong the holding period for an investment. With that in mind, if the end of the planned holding period is approaching or has passed, or an exit must be assured to meet fund return targets, a trade sale can be used as a backup option to potentially expedite the exit process and receive the full proceeds from a sale.

– Control over exit value – If a PE firm wants more control over the exit value, an IPO filing will help to establish a price floor, and the additional competitive pressure of a viable IPO process can drive bidders to submit higher offers. Research confirms the wisdom of this strategy: A study published in the Journal of Business Venturing examined 679 exits from 1995-2004 and found that PE firms following an active dual-track exit strategy earned a 22-26% higher premium over those which pursued a single-track exit approach.

In contrast, a more reactive approach may be appropriate if resources are limited or the firm doesn’t want to fully divest its investment.

John Jenkins