Exits – Signs of Life Amid Challenges
The private markets exit environment has been challenging, but there are signs of recovery. Continuation vehicles, strategic acquirers, and IPOs are offering light at the end of the tunnel.
Another Tough Year for Exits
Not much of a surprise here, we have been hearing that the whole of this and last year. And I cannot help but start wondering, if this common mantra for GPs is also not becoming a convenient excuse for many GPs for failing to create exits?
Afterall, some GPs seem to be doing just fine on exits and DPI regardless of a tough exit environment.
LPs are obviously disappointed that distributions are not ticking in, as promised, like clockwork and in line with their models. But this has never been the case in private markets and underscores that LPs need to be much more sophisticated in their portfolio construction and thinking / planning for liquidity.
20% of exits this year is continuation vehicles
In this exit environment continuation vehicles (CVs) are an increasingly attractive alternative for many GPs to selling ‘trophy’ assets. It can generate some much-needed liquidity for GPs and meaningful distributions for LPs.
CVs are here to stay and are a legitimate exit option. But LPs should in general be very conscious of CVs. And, among other things, carefully consider, what the actual motivation for a CV is, what the definition of a ‘trophy’ asset is (this differs quite a bit depending on which GP you ask), who is leading the transaction, how much of the proceeds are being rolled over, what the terms and conditions are.
And finally, if the GP in question is simply selling to themselves whether they are doing the job for which they are paid. I.e. buy something (well), do something (good) with it, and sell it again. Does this merit the same amount of fees and carried interest. This is another important topic that I will dive deeper into in another post.
A couple of exits thoughts for GPs
The panels on exits were not groundbreaking in their takeaways, but what was discussed is nonetheless worth repeating.
Exits across asset classes can be ‘engineered’ / planned. After 3 – 5 years there is often a need for fresh capital and possibly re-energizing the ownership / cap table. Also, even if the IPO market is dormant, large corporates are still ready to buy growth and good assets.
Thus, it is critical that companies no matter the stage are ‘always’ exit ready and the exit should be part of the initial investment thesis and should be regularly revisited.
Here having an exit committee or a portfolio monitoring team to drive the process is not only a good idea but is getting more and more common. Importantly an exit committee should be separate from those who made the investment, and it should ideally be data driven.
Even if performance is currently great and the potential for a better outcome still exists, a ‘dispassionate’ exit committee is more likely than the deal team to also consider the risk and take money off the table.
There is some light at the end of the tunnel for exits
Secondary funds and CVs are, as mentioned, doing well, strategic acquirers are active and the IPO market is awakening.
There is still a gap in valuations, but helpfully the companies have started to grow into the valuations and valuations are again starting to increase. This will help support a better exit environment.
But for LPs this critically does not necessarily mean that the GP has done well!
Exits remain a cornerstone of private equity performance. While challenges persist, forward-thinking GPs can navigate this environment successfully by staying prepared, leveraging opportunities like CVs thoughtfully, and maintaining a focus on value creation.
Stay Illiquid
Kasper Wichmann, CEO Balentic
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