Exit Strategy in Making Investments

Exit strategy is an extremely decisive fraction of making investments. In fact, knowledge of exit options is an essential concomitant of entry and Private Equity (PE) investors must be very clear about their exit options and strategies. It is significant for an investor to be able to divest its holdings and exit in the most profitable and swift way. Broadly speaking, the following are the most common exit options available to PE investors:

Initial Public Offer (IPO)

IPO, the traditionally preferred route, is the method whereby the investors will have a right to offer their shares for sale to the public and then exit. The most evident benefits include longer-term shareholding benefits to the investor in the company and higher valuation, which is dependent on the prevailing market conditions. However, the listing of the shares of a company is subject to strict regulatory requirements and restrictions, which make the IPO a lengthy and expensive process. Despite the cumbersome process, IPO exits are seen as the primary mode of exit. Instances of IPO exits in 2013 are SAIF’s exit from JustDial and TPG’s exit from Shriram Transport Finance. Apparently, for PE investors, what made a good year for exits the great year was the strength of IPO channel in 2013. The number of IPO’s for buyouts soared 67% worldwide from 112 in 2012 to 187 in 2013.

Put Option

An exit via put-option involves a put option right with the PE investors on shares of the promoters of the company. Previously, Reserve Bank of India (RBI) was of the view that the put-option exit arrangements are not valid because it is a guaranteed exit at a guaranteed price which is equivalent to an external commercial borrowing. This view taken by RBI left the PE investors in dilemm...

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