PE Investing in India and Exit

Options

Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• PE investors usually have an investment horizon of 5-7
years and plan to exit after making a substantial profit on
their investment. Some of the exit strategies are discussed
below:
• Initial Public Offer (IPO)
Initial public offering (“IPO”) or as sometimes referred to
“flotation” or “listing” is the method whereby the
company’s shares get listed on the stock market for the
first time, so the investor will be able to sell its shares to
the public.
• This is one of the most popular exit strategies used by PE
providers, due to the fact that when the proper market
conditions are available, this method is likely to enable the
investor to realize the highest return on its investment.
Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• IPOs also have serious disadvantages compared to
other exit methods.
• First of all, the public offering of shares in itself does
not mean an exit.
• The PE provider will only be able to exit its investment
when its shares are actually sold on the stock market,
which is very unlikely to happen simultaneously with
the IPO.
• Therefore, the investor seeking to perform an exit will
be exposed to fluctuations and other market risks for
a certain amount of time after the IPO is carried out.
• Also, the listing of the shares of a company is typically
subject to strict regulatory requirements and
restrictions, which make the IPO a lengthy and
expensive process.
Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• Trade sale/ Strategic Sale
Another commonly used exit route is the trade sale in which
the PE investor sells all of its shares held in a company to a
trade buyer, i.e. a third party often operating in the same
industry as the company itself.
• This method is preferred by PE providers mainly because it
provides a complete and immediate exit from the investment.
• Also, the negotiations take place with a single buyer which
allows for a quicker and more efficient process which is not
subject to the regulatory restrictions applicable to IPO
transactions.
• In a trade sale transaction, the investor can also exercise more
control over the whole process, and in certain cases might
even end up obtaining a higher value for the company
compared to other exit methods.
Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• On the other hand, trade sale is not free from potential
problems and risks either.
• The management of the company may be resist such a
transaction as the change of control often results in the
replacement of the company’s management as well.
• A trade sale might also entail serious business risks as the
buyer is at times a competitor of the company, which will
inevitably obtain confidential business information during
the negotiation process.

Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
Secondary Sale
• In this case, the company is sold by a PE
investor to another PE firm.
• In other words, the particular nature of a
secondary sale/buyout lies in that PE firms
appear on both sides of the deal, while in the
average transaction PE investors would only
be involved either as seller or purchaser.

Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• There are a number of possible reasons why an investor may
choose this method as the exit route.
• It can be a means of shortening the life-time of a transaction
which has become a priority for PE firms in the recent
economic climate, and therefore secondary buyouts have
become increasingly popular.
• Sometimes, the investor which carried out the original
acquisition is not willing to (or cannot) finance a business
anymore, even though the company might not yet be ready for
a trade sale or IPO.
• In that case, selling the company to another PE firm which sees
potential in further developing the company might be a
reasonable solution.
• This method can also be used by the management when they
wish to replace the PE investor backing the company.
• A secondary sale offers the advantages of an immediate and
complete exit and it can be carried out even faster than a trade
sale or an IPO.
• This plays a significant role in its increasing popularity.
Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• Leveraged Recapitalization
• Leveraged recapitalization is a partial exit method, whereby the PE
investor is able to extract cash from a business without actually
selling the company.
• This is achieved by re-leveraging the company i.e. substituting some
of the company’s equity with additional debt.
• It is usually done by the company raising money by borrowing from
a bank or issuing bonds, which amount is then used to repurchase
the company’s own shares from the investor.
• The most important advantages generally associated with leveraged
recapitalizations are that investors can remain in control whilst still
receiving payment.
• On the other hand there are significant disadvantages to this
method too.
• A leveraged recapitalization may result in over-leverage that can
eventually lead to financial difficulties and even bankruptcy.
• Also, increased leverage limits the flexibility of the company’s
operations.
Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A
 PE Exits
• Repurchase by the Promoters
This is also a successfully used exit strategy,
where the management or the promoters of the
company buy back the equity stake from the
private investors. This is an attractive exit option
for both the investors and the management.
• Liquidation
This is the least favorable option but sometimes
will have to be used if the promoters of the
company and the investors have not been able to
successfully run the business.

Mousumi Bhattacharya_PGP_2022-
2024_Term V_M&A