DealLawyers.com Blog

In the current deal environment, private equity sponsors are increasingly looking for alternative ways of generating liquidity for their investments. A partial exit, in which the sponsor liquidates part of its investment in a portfolio company while retaining an ongoing interest in the business, is one increasingly popular alternative.  This recent Foley blog addresses the potential benefits and challenges associated with partial exits. This excerpt provides an overview of some of the reasons why a sponsor might consider a partial exit:

There are several reasons why a firm might choose to do a partial exit instead of waiting for the exit event, including pressures from investors to generate liquidity. Firms have been holding onto their portfolio companies for extended periods since the end of the “zero interest rate” environment, which can lead to pressure from their investors. Bain & Company’s Private Equity Mid-Year Report states, “While exits also appear to have arrested their freefall, activity has landed at a very low level. And as limited partners (LPs) wait for distributions to pick up, most funds are still struggling to raise fresh capital.”  A partial exit provides immediate liquidity that can be utilized to either invest in new opportunities or return capital to investors, helping manage the fund’s lifecycle.

There can also be a highly strategic component to a partial exit depending on who purchases an interest in the asset. A strategic investor can often bring in new expertise, resources, or access to new markets that can aid in the company’s growth. Suppose the investor brings complementary strengths to the partnership. In that case, it can also guide the company’s direction, positioning the company for the kind of growth that can lead to an exit at a much higher valuation down the road.

Finally, a partial exit provides a valuable mark to the portfolio’s valuation for the general partners and their marketing to new and existing LPs for the next fund.

Challenges associated with a partial exit include the need to ensure an alignment of interests between the sponsor and the incoming investor so that there is a clear strategic vision for the portfolio company, as well as the complexities associated with establishing an acceptable balance of control and decision-making authority between the sponsor and the new investor.

– John Jenkins