EXIT STRATEGIES IN PRIVATE EQUITY
INTRODUCTION
In the private equity (PE) investments landscape, successful exits are paramount to investors who are keen to recoup their investment and help position the company in a better way post-exit. An exit strategy refers to how an investor plans to liquidate their investment in a company, either by selling their equity stake, through an Initial Public Offer (IPO), and Secondary Sale, or other exit means. Properly executed exit strategies are not only essential for investors but also beneficial for the company, as they often mark significant growth and success milestones for the company.
However, the exit environment has proven to be a persistent challenge for some PE firms to exit their investment, particularly in Africa, where during economic downturns or periods of market volatility, (such as forex risk, political instability, etc.)., investors experienced increased difficulty in finding suitable exit opportunities, leading to longer holding periods or lower liquidity.
This predicament was highlighted in a 2021 survey by the African Private Equity and Venture Capital Association (AVCA), where seventy-one (71%) percent of Limited Partners (LPs) identified the weak exit climate as the biggest challenge for investing in African private funds. Also, according to thedata from AVCA, only seventeen (17) companies were sold by PE firms across Africa in the first six (6) months of 2023, accounting for the lowest in nine (9) years despite some positive momentum in 2022, which recorded a total of eighty- two (82)exits by the end of the year, the most since 2009. These are not good signs for the Africa Investment clime to attract investors and calls for action to aid smooth and successful exits.
Though, in 2023, there has been a decline in global private equity exits, this has been due to economic imbalances in the financial economy of global economic powers orchestrated by high credit and interest rates and valuation gaps between sellers and purchasers. Nigeria has not been immune to this trend,issues such as; high interest rates, inability to repatriate foreign exchange (Forex) due to Forex instability, the devaluation of the Nigerian naira against the dollar, lack of proper legal guidance,and political economies (such as the last election cycle) and the volatile nature of the currency are major identified challenges, which create uncertainty for investors to exit.
Considering these circumstances, it becomes expedient to address the key considerations for successful exits in private equity and proffer solutions that ensure that investors navigate these challenges while maximizing their returns going forward.
WHAT IS PRIVATE EQUITY EXIT?
A private equity exit refers to the process of selling or disposing of an asset in an investee company to generate returns on investment after a specific holding period. In private equity, investors typically hold onto their assets in investee companies, and they work towards increasing the value of the asset through operational improvements, streamlining product or service lines, restructuring the organization, and afterward, the PE investorseeks to part ways with the investee company through either a secondary sale, IPO, or other exit means.
The significance of this exit can be attributed to several key factors. Firstly, a well-executed exit confirms the underlying value of the investee company, and this can attract further investments and help raise additional capital for future economic ventures.
Also, a well-executed PE exit contributes to the development and nurturing of the overall private equity ecosystem. When investors witness successful exits, it fosters confidence in the market and encourages more entrepreneurial activity. Moreover, PE exits offer investors the chance to strategically manage their investment portfolios as Investors liquidate their investments to reallocate assets, gain liquidity, reduce funding liabilities, hedge their investments, and manage key limited partner (LP) relationships.
TYPES OF STRATEGIC EXITS IN PRIVATE EQUITY
In the Nigerian market, private equity investors have various options available for exiting their investments in investee companies. These options include trade sales to strategic buyers, secondary sales, IPOs, management buyouts (MBOs), schemesof arrangements, and share redemptions. Each exit option requires careful consideration.
KEY CONSIDERATIONS FOR SUCCESSFUL PRIVATE EQUITY EXITS.
When planning a successful PE exit in Nigeria, there are several key considerations; They are:
Therefore, religious adherence to the above-listed key consideration will ensure that the PE investors’ exit process is smooth and seamless and the investee company is put on theright sustainable growth for success upon the PE’s exit.
NAVIGATING CHALLENGES FACING PRIVATE EQUITY EXIT IN NIGERIA
The Nigerian Private equity exits present various challenges that investors must navigate to achieve successful outcomes. One significant challenge especially in the year 2024 is the uncertainty and volatility of market conditions and foreign exchange, which can impact the valuation, demand, and attractiveness of portfolio companies. To overcome this, investors need to closely monitor market conditions, adapt their exit strategy, and ensure portfolio companies are well-prepared with strong financial performance and governance structures.
Further, there is a need to align the interests of different stakeholders involved in the exit process. Conflicting expectations and incentives can create tensions during the exit process. Thus, clear and transparent communication, mutual trust, and appropriate incentive schemes can help overcome this challenge and align the interests of fund managers, investors, investee companies and every other stakeholder.
The execution of the exit itself poses another challenge. Managing various tasks such as engaging exit partners, conducting market research, negotiating exit terms, and facilitating due diligence and closing processes can be complex and time-consuming. A clear exit plan, allocation of sufficient resources and expertise, and maintaining a constructive relationship with exit partners are essentials for successful execution.
CONCLUSION
Private equity exits come with challenges that require careful navigation. During the exit process, certain key considerations such as tax, due diligence, compliance with relevant laws, regulations, and regulatory approvals are significant in a smooth exit process.
Also, monitoring market conditions, aligning stakeholder interests, ensuring exit readiness, and executing the exit plan effectively are needed to overcome these challenges and achieve successful exits, especially in 2024 and going forward.
Thus, while adopting the issues outlined above, it is recommended that PE investors exiting an investee Company should also consider the very long-term survival plan of the investee companies through a post-exit synergy, to maintain operational solidity and efficiency upon exit.