One Fifteen Post – Exit Strategies
You find an appealing company to invest in and find the right time to enter the position. The company is performing well, achieving milestones, growing steadily, and generating cashflow for the business. After a period, you feel that the company has now transitioned into a new phase of its lifecycle, how do you turn your ‘paper’ gains into realised gains?
Unless the asset you have invested in is a public company and has a high volume of liquidity (shares) being trading daily, sometimes exiting a position can be a headache. If the company is public, when you feel the investment thesis is no longer attractive and it’s time to leave, you can put your shares up for sale on the stock exchange and turn them into cash.
If, however, the company you invested in is not (yet) a public company, there are several ways to exit the position when the investment thesis changes in a negative manner. Here are some of the more common exit strategies to consider:
1. Initial Public Offering (IPO)
2. Mergers and Acquisitions (M&A)
3. Secondary Offerings
4. Recapitalisation or Refinancing
5. Management Buyout
1. IPO:
An IPO is an initial public offering of the company. This allows investors who already own shares in the company to sell their shares on the stock exchange, providing liquidity, and converting their investment into cash.
The advantages of this method are that the stock exchange is far more liquid than the private market, ability to capture the full valued of the investment due to stringent reporting criteria, increased visibility, and credibility of the company.
The disadvantages of selling the position to the public is that it is a complex and time-consuming process involving stringent regulatory requirements, high cost associated with IPO preparation and underwriting fees, potential for market volatility affecting stock price.
2. M&A:
M&A is when the company is acquired by another company. The structure of M&A is different for each deal, but this strategy can enable investors to sell their shares as part of the acquisition deal or gain shares in the acquirer.
The advantage of M&A is that it offers an event where there is a potential cash pay out, shares in the new company, or a hybrid of both. There is also the potential for multiple bids from various acquirers, which can help ‘bid up’ the valuation of the initial company.
There can be a few disadvantages of M&A. Firstly, is finding a suitable acquirer. M&A is a complex, time consuming, and distracting process that is at constant risk of falling through, taking away from managements main focus of the underlying business. Then there is also potential that the offer is a lower valuation than IPO. The structure of the company post-acquisition can also be impacted depending on the deal structure, leading to founders no longer in control.
3. Secondary Offerings:
A secondary offering is an acknowledged way for investors, employees, and founders to sell their shares to new investors like family offices or institutional buyers. As a relatively new phenomenon, Australia now has secondary funds servicing employees/investors looking for liquidity in the private markets.
The advantage of secondary offerings is that it provides an exit without need for IPO or acquisition, it is also a relatively faster execution, flexibility in pricing and structure, as well as the potential for attracting new strategic investors without diluting the company.
The disadvantages of this process is that it is limited to accredited investors, family offices, or qualified institutional buyers, may require discount to ‘market’ price to entice buyers.
4. Recapitalisation or Refinancing:
Restructuring the company’s capital structure through additional debt or equity to provide an exit opportunity for investors.
Advantage of this pathway is that it allows early investors to exit or reduce their stake while the company continues operating, potential for improved capital structure, and financial flexibility.
Disadvantages of this method are that it may not provide immediate liquidity, the potential for conflicts between existing and new investors, increased debt burden depending on the financing terms.
5. Management Buyout (MBO) or Employee Stock Option Plans (ESOPs):
MBO or ESOP is when existing management or employees buy out investors, acquiring a controlling stake in the company.
Some advantages of this pathway are that it offers a transition plan, allows existing management or employees to gain control, potential for alignment of interests, and maintains continuity in the company’s operations.
Some disadvantages of this method are that it is limited to situations where management or employees have the financial capacity to buy out investors, as well as the potential for conflicts of interest between management and other stakeholders.
Each exit strategy has its own benefits and drawbacks. There are common variables (Growth rate, market conditions, investor preferences, etc.) that can add or inhibit the valuation of a company when it comes to a liquidity event. Working with an experienced financial advisor can help navigate the complexities of each strategy and assist in making informed decisions based on company specific circumstances.
One Fifteen Team and Advisory Partners have helped raise roughly $100m worth of capital for ANZ companies in the last 18 months and $750m via IPO over the last 20 years. We have a deep relationship with a wide pool of high net worth individuals, over 100 family offices, and many institutions to service any capital needs.
For more information on exit strategies or general capital advice, reach out to the team at One Fifteen Capital.
