March 19, 2019

Private Equity: “Dual Track” Exit Strategies

When it comes time to exit their investments, PE funds sometimes adopt a dual track strategy under which they simultaneously pursue a sale process & an IPO of the portfolio company.  This Cooley blog addresses the key factors that should be considered in deciding whether to pursue this type of strategy. Here’s the intro:

Relative to choosing a single exit strategy, a dual-track process tends to be more complicated and resource-intensive, while also posing some specific risks. However, if the right dynamic is created, a dual-track process can provide visibility of relative valuation and the benefit of optionality, maximizing the chance of securing the most favorable terms.

Whether there’s a looming threat of a government shutdown or a sudden stock market sell-off, or the auction bids come in below expectations, the alternative track may present a superior exit option. A dual-track process reduces the possibility that the vagaries of the stock market and industry-specific dynamics will have a detrimental effect on the overall exit by opening the investment opportunity to public markets as well as financial and strategic investors, with each influenced by the others.

The blog points out that there’s no “one size fits all” approach to a dual track process. It also notes that while maintaining confidentiality concerning competing valuations, timing, drivers, etc. is essential, the knowledge that the portfolio company may be pursuing an IPO exit could drive the M&A valuation higher, particularly with strategic buyers.

John Jenkins