Preparing for Exit

Are there finite parameters that determine exit planning?

• The assembled Private Equity professionals at our most recent Roundtable outlined several different approaches to exit planning. Some of the professionals made it clear that their funds lay out a pre-defined plan around exits. Such plans are based around both the duration of the hold period and the company’s attainment of defined financial and operational benchmarks. A periodic and structured approach to portfolio company reviews, including performance versus strategic plan and valuation updates, facilitate a sponsor’s evaluation of exit prospects. One attendee offered an interesting qualification to this roadmap, pointing out that sponsors have had to be more proactive in the sale process recently, “we’ve had to alter our approach so that [our portfolio] companies aren’t bought, but instead sold.”
• Some other senior participants had a different perspective, one Managing Director saying “we don’t think of exiting in any context of timeframe. Every business has unique factors influencing the exit timeframe.” Other participants reinforced this point, one observing that “there are natural catalysts to prompt the sale process.” He elaborated that “when multiples are high, as they are now, we find it’s best to reinvest in existing portfolio companies, rather than looking to invest in new assets.”

“We don’t think of exiting in any context of timeframe.”

• A consensus across all participants was that exit planning and preparation needs to start from day one. A Partner even clarified that his firm starts “to think about the exit even before making an initial investment.”

What is the most effective logistical approach for assessing an exit?

• The most immediate point of emphasis, common among all of the Roundtable participants, was the need to have granular and up-to-date reporting systems. An accurate reporting platform enables sponsors to efficiently determine if an investment is on track or underperforming and communicate this clearly to management teams.

Private equity firms are generally conducting more rigorous pre-sale diligence processes.

Administering a sell-side Quality of Earnings alongside management is becoming more common and can “serve as a shadow to the buyer’s QOE.” A number of professionals in attendance rallied to this point, one Managing Director in particular adding “a seller QOE prepares the CFO and finance team as a ‘dry run’ rehearsal for the rigorous diligence that is soon to follow. Attendees also pointed out that conducting a market assessment pre-sale is a great coaching tool for the CEO and management team. Redacted versions of these materials can be included in the data room.

• A number of professionals brought up how important it is to have both the sponsor and management team actively involved in “finding and fostering relationships with potential buyers.” This was put clearly by one participant, “encourage management teams to meet with bankers and develop relationships with prospective buyers. For those portfolio companies with IPO potential encourage the CEOs to go to industry events to work on pitching the investment thesis.”

What is the most effective way to engage with bankers in the sell-side context?

• As with most considerations there were a number of perspectives on this issue. For example one Managing Director observed that it “depends on industry, i.e. is it niche or thematic? Sometimes GPs can hear interesting or out-of-the-box thoughts from bankers on how to position companies.”
• Technology improvements and the widespread implementation of best-practices are compressing the sale process, which in turn means tighter networks between management teams and investment banks. One Principal commented on a distinct benefit of this shifting and rapidly shrinking landscape, “now that there are only a few participants, those that are not chosen proactively come back to you and want to start a dialogue. It’s good to be creating inbound interest.”
• Two participants agreed on the very concrete approach of “going with bankers who have the most access to buyers. It’s all about the relationships the banker has with potential buyers. As investors, we know the business best and how it should be valued. We don’t need to rely on bankers valuations; but their relationships with buyers are key and how we decide who to work with.”

What are the considerations around pursuing an exit via IPO? 

• Investment size and profile seemed to be the main considerations around the IPO process. One Managing Director elaborated, specifically regarding her firm’s mid-market investments: “prepare every company as if it going to go public. This forces companies to professionalize and prepare for everything even if the outcome is a trade sale.”

“Prepare every company as if it is going to go public. “

• One of the main challenges, particularly in founder-controlled companies, is assessing and building up the management team’s comfort level with an IPO. According to one participant, before they even make an initial investment they will try to have conversations with the management team about “IPO success stories.” A lack of enthusiasm from management can possibly lead to the sponsor passing on the investment.