Private Equity and

Venture Capital
Atul Kedia
Exit
Session 13

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Why Exit?
LPs – realize returns; know if the fund has lived up to their expectations
PE Funds - PE investments are made for a limited time and with a clear goal
PE firm - ability to achieve timely and profitable exits reliably across multiple funds is a
key measure of success applied by financial market players
Interim valuations do not paint a complete picture nor guarantee a successful outcome
Exit allows to reallocate funds, potentially for higher returns

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The Entrepreneur’s dilemma
Aloka, an entrepreneur, started FMI Pvt Ltd to provide fitness training to HNIs in Mumbai.
The initial investment was funded by 2 VCs to the extent of 60% of overall equity
(remaining 40% by Aloka). The VCs had an investment horizon of 4-5 years and engaged with
a sell-side advisor around that timeline. A potential buyer was found, who was ready to buy
not less than 100% stake at an attractive valuation providing 15X MOIC to Aloka and VCs.
Aloka, being passionate about her company, became hesitant in removing herself from
primary ownership and decision-making structures of the business. What should Aloka do?

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Exit considerations
PE fund management model
raise closed-end funds from external institutional investors with the mandate to invest in private companies, hold
for a limited time period and, upon successful sale, return capital to investors, within the finite lifespan of a fund.
Returns determine fund level profits, directly impact PE firm’s ability to raise a follow-on fund
Not all LPs may have uniform view on returns – IRR vs MOIC
Early in fund’s life
Important signal - essential when raising follow-on funds
May adversely affect MOIC; though IRR could be locked in
Later in fund’s life
incentive for fund managers to delay exits to maximize money multiples and thereby carry (assuming the fund is
performing above hurdle), potentially at the expense of LPs who are looking for earlier returns.
“Zombie” funds
“Exit shaping”

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Exit considerations
VC/PE should control the exit – Board control / contractual rights / power to refuse further funding
Successful exit – reward for taking risk and dedicating personal time and resources to create
something of value
Concept of exit is relatively tenuous in case of early stage investing
A mutual understanding of exit expectations would be a worthwhile discussion at the DD stage
‘Drag-along’ clause in the contract
‘Tag-along’ right
Valuation depends on changing moods of the market and measurements applied!
‘Ideal exit’ may be difficult to achieve - exit when the market for the investee venture is highly
attractive

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Exit shaping
Deal Sourcing, Due Diligence and Execution
Optionality is the key
Contractual terms – influence
Management incentive packages
Managing portfolio companies
Exit plans finetuning
Value accretive projects
Enhance processes and governance
Monitor broader market
Exit preparation
IM - operating, financial, legal info
PE Exit Preparation
VDD
Staple financing
Sell-side advisors
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Exit strategies
IPO

Secondary
Trade
sale

Repurchase
Exit
by
Buy
promoters back

Liquidation
Dividend
Recap.

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Sale to third party
The most common exit path from a majority investment
Typically ensures a full exit with a full cash payment
Significantly more transaction flexibility and control over the exit process than an IPO
Strategic Buyers
Depends on Strategic investors’ operations and expertise in an industry and perceived synergies
Often entices “strategics” to propose a higher valuation than financial investors
Familiarity with a given industry often reduces the due diligence required on a target
Financial Buyers
PE funds regularly acquire stakes via secondary and tertiary transactions from other PE investors
Higher degree of certainty of closing, as well as the ability to execute faster than strategic investors
Only minimal governance and strategic alignment as their needs are broadly similar to those of the exiting PE investor
Good alternative for partial exit bridging unfavorable market conditions for a full exit via IPO or strategic sale
Typically require extensive due diligence to become familiar with a company and its sector, are hard negotiators
LP’s perspective who is invested in both funds?
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IPO
Rarely allows the PE fund to divest fully from the portfolio firm
In most cases, PE investors achieve full exit through follow-on offerings (after lock-up period)
Advantages:
Typically the highest returns relative to other exit
Retained ownership allows PE investors to benefit from future appreciation
Liquidity and daily price discovery of a listed company allows to optimize the timing of follow-on offerings
Reputational benefits of a high-profile IPO
IPOs tend to receive strong support from management
An IPO announcement alone can prompt bids from strategic and financial investors
Disadvantages:
Failure at any stage can adversely affect the credibility
IPO market is notoriously cyclical and prone to market and macroeconomic shocks
Expensive affair
Disclosure of sensitive information through a publicly available prospectus
Tricky to offload remaining stake
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Select IPO Exits in India
Justdial
Info Edge (parent of Naukri.com, JeevanSathi.com, 99acres.com, and Shiksha.com)
Matrimony.com
Quick Heal
IndiaMART
Mrs. Bectors Foods Specialities Ltd
Happiest Minds Technologies Ltd
Computer Age Management Services Ltd
Burger King India

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Exit alternatives and considerations

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