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During the past several years, owners and companies have increased the use of creative exit strategies to provide themselves additional flexibility. We see companies using a wide variety of strategies — minority interests, joint ventures (JVs), Initial Public Offerings (IPO) and outright sales — to monetize their investments. Most commonly, we see a dual-track strategy by private equity (PE) sponsors and venture capital firms, which involves pursuing an IPO while simultaneously exploring the sale of portfolio companies through a private auction.
We see variations in how dual-track strategies are executed, depending on factors such as market conditions, sponsor motivations, and resources available. Firms may choose to be proactive or reactive in their approach — either openly pursuing willing buyers while moving closer to an IPO, or only considering purchase offers they receive.
Some circumstances dictate a more proactive approach to implementing a dual-track strategy. The key considerations have to do with market volatility, holding periods, and the desire for more control over the exit value:
In certain circumstances, a reactive posture may be warranted — specifically, if resources are limited or the firm doesn’t want to fully divest its investment:
Whether to adopt a proactive or reactive stance also depends on the sponsored company’s financial situation. If the credibility of the company’s private financial information (e.g. inventory levels, sales trends, investment valuations, etc.) needs to be conveyed to potential bidders or the market as a whole, but the sponsor wants to maintain confidentiality, this can be achieved through the rigorous disclosures and marketing efforts required in order to go public. Depending on the strength of the company financials, the sponsor may decide to be either proactive or reactive in its pursuit of a concurrent trade sale.
A dual-track exit strategy can be both rewarding and demanding. Given the trade-offs of the two tracks in terms of complexity and cost, the viewpoints of multiple stakeholders must be considered, including board members, fund investors, buyers, co-sponsors, and company management. Likewise, the importance of selecting the right advisor must also be stressed.
¹PwC, “2017 Annual US Capital Markets Watch.”
²Hugh MacArthur, Graham Elton and Suvir Varma, “Exits Settle At A New Normal In Private Equity,” Forbes, March 9, 2017.
³James C. Brau, Ninon K. Sutton, Nile W. Hatch, “Dual-track versus single-track sell-outs: An empirical analysis of competing harvest strategies,” Journal of Business Venturing, 2008.