Lecture 6 - Investment Process - Exits Flashcards
Four typical types of exists in PE
- IPO
- Trade Sale
- Secondary Sale
- Recapitalisation/one-time dividend
What happens in the IPO?
Company issues both primary and secondary shares to public equity markets
- primary shares raise funds for the company
- secondary shares raise cash for the fund
What is a trade sale?
Company is sold to a strategic buyer
- company is acquired to strengthen an exisiting business
- not intended for later sale
What is a secondary sale?
Entire company is sold to an investment buyer
- company is acquired with the intent to be sold later on
- often another PE firm
What is recapitalization/ one-time dividend?
- fund issues itself a one-time dividend: effectively large cash payment to fund
- fund issues further debt on company: realises all or part of issue as a return
What is the advantage of an IPO?
- Fund can benefit from further increase in company value on public market
- high exit proceeds
- lower potential for conflict btw. investors and managers
- access to a large source of capital
What are the disadvantages of an IPO?
- Fund must realise its gains over time
- exposure to potential downside fluctuation in public market value
- limited amounts of high flyers
- strong dependence on stock exchange conditions/IPO window
- ongoing reporting obligations of a public company (may not be used to this)
Pros/Cons trade sale?
- fund achieves complete exit of investment
- potentially high exit proceeds
- possibility to exit in case of a moderate development (if IPO not possible)
- easier, quicker, and cheaper than IPO transaction
- no further risk/opportunity of further performance of the company
- might have to accept non-cash (share) payments
Difference primary and secondary shares
A primary share is a new share that is issued by the company to new or existing investors and the capital raised is used to fund the company’s growth.
Secondary shares have already been issued and are owned by existing investors or employees in that company.
What is a recapitalization/ one-time dividend?
PE fund issues itself a one-time dividend from the portfolio company: effectively a large cash payment to the fund
- the fund then issues further debt on the company so that the company can use that new debt to pay off the interest for the old debt (because FCF was payed to the PE fund as dividend)
What is recapitalization definition (Investopedia)
Recapitalization is the process of restructuring a company’s debt and equity mixture, often to stabilize a company’s capital structure. The process mainly involves the exchange of one form of financing for another, such as removing preferred shares from the company’s capital structure and replacing them with bonds.
Pros and cons of recapitalization/ one-time dividend
- The fund can realize a return while maintaining ownership of the portfolio company
- (risk exposure is less because some invested capital is returned)
- portfolio company debt load increases
5 Steps in the exit process
- Identification of exit opportunities and evaluation of exit routes
- Mandate advisers, assign responsibilities, and design exit process
- Preparation and launch of the exit process
- Negotiation with bidder and evaluation of offers
- Transaction closing and ex-post review
–> Market and portfolio company characteristics determine the necessity of an anticipatory or flexible exit process
What are the two opposing views on liquidation?
Corporate Finance Theory: Sunk cost fallacy
vs.
Strategic Concern: liquidating a company is admitting failure
What are success factors of an IPO?
- speed, coordination, and timeliness
- IPO team working together to raise the company’s public profile and awareness to the impending floatation
- generation of a perception of scarcity among potential investors
- positive market view of the company’s future
- positive exogenous factors
