Private Equity investors must be unambiguous and clear about their exit options at the inception of investment. Profits accruing to Private Equity investors pivot on their terms of exit and therefore the investors want to be prepared right at the outset.
The ultimate objective for Private Equity Investors is to realise the return on their investments is typically within 3 to 7 years, after the original transaction took place.
Performing an exit is a process by the Private Equity firm to achieve to realise return on their investment which is a natural part of every equity transaction. The Private Equity house has a strong influence on its ability to attract investors and raise funds owing through the transparent path of exit options.
Accordingly, potential exit opportunity from an investment plays a highly vital role in an investor’s decision, about whether or not to invest in a company. This is the reason why “Exit Option” receives such special attention from the initial stages of the deal.
The Modes of ExitsOptions are stated herein below:
This is a traditionally preferred route. An Initial Public Offering or an IPO is not an exit by itself. Private Equity Investors will have a right to offer their shares for sale under an IPO and then exit.
An IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it is known as Initial Public Offering (IPO). The following are the reasons why Private equity investors go public or use IPO as a mode of exit –
The Strategic Acquisition or Trade Sale is one of the most popular exit routes for Private Equity funds. The buyer will usually have a strategic advantage in acquiring this business as they both complement each other. For this reason, the buyer will always pay a premium to acquire such business.
Management buyout is when you decide to recapitalise and sell the company to the next generation of managers. This type of transaction is usually financed through some combination of debt, with the debt collateralized by the assets of the company.
This is typically used when the Private Equity Investors wish to exit from all their investee companies simultaneously. The primary reason for the rise of this route would be an ageing equity fund that demands an early exit.
The Drag Along Right assures that if the majority shareholders sells their stake, the minority shareholders are forced to join the deal. This right protects the majority shareholders and make available the right to the investing shareholders to force the other investor to exit, usually on the same price and terms.
Whereas, Tag Along Right, protects the minority shareholders and bestow the minority shareholders a right to join the deal and sell its stake at the same price and terms, as it would apply to the majority shareholders.
Another mode of exit is the Buy Back/Put option, which is the most widely adopted mode of exit used by investors. Such option is a part of Shareholders/Investment Agreement, when the investors put money in unlisted entities. An Exit via Put Option involves a Put Option Right with Private Equity Investors on shares of the promoters of the company. The promoters buy-back the investors shares at a pre-determined price at a particular date in future.
Exit via Mergers and Acquisition, will increase capital for further expansion of business however this mode of exit is only used as a “back-up”.
A sale to a financial investor is also an additional mode of exit and much preferred for the reason that that private equity investor will have to deal only with one buyer unlike in an IPO, where multi parties are involved. Furthermore, a sale provides payment in cash and a clean and complete exit for the private equity investor.
RBI Master Circular on Foreign Direct Investment – Pricing Guidelines dated January 9, 2014.
In case of a listed company, the non-resident investor shall be eligible to exit at the market price prevailing at the recognised stock exchanges.
In case of unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (ROE) as per the latest audited balance sheet.
Investments in Compulsory Convertible Debentures (CCD) and Compulsory Convertible Preference Shares (CCPS) of an investee company may be transferred at a price worked out as per any internationally accepted pricing methodology at time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.
The guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit.
One can recapitulate the pros and cons of the various “Exit Routes” bearing in mind the motives of the Private Equity Investor is crucial to achieve the expected return on exit.
Private Equity has become attractive investment vehicles for wealthy individuals and institutions. India’s emerging Private Equity group has focussed on building the right foundation for a leading Private Equity firm.
Private Equity contribution to fund raising in India has increased over the last 15 years from 20% of the total capital raised in 2001- 05 to 31% in 2006-10 to 46% in 2011-14.
Besides developing a team with structuring and performance skills that are pre requisition to a successful transaction, importance of “Exit Options” has become pivotal in a strong influence on its ability to attract investors and raise funds.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
