Investing in the private market can offer opportunities to investors, but the journey can hinge on effectively navigating exit strategies. Understanding the nuances of various exit possibilities—such as IPOs, mergers and acquisitions, and secondary buy-outs—can be important for investors seeking to meet their investment goals.

Exploring Exit Strategies:

Exit strategies represent the culmination of an investor’s journey in the private market. Some of the most common exits for startups include Initial Public Offerings (IPOs), trade sales, and secondary buy-outs. Investors do not have a say in the ultimate exit strategy taken, but investors can potentially benefit from the avenue chosen by the company.

Initial Public Offerings (IPOs):

IPOs can mark a pivotal moment for companies transitioning from private to public ownership. An IPO is when a company decides to list and sell shares on a stock exchange such as the New York Stock Exchange (NYSE) or NASDAQ. At this point, the general public is able to purchase shares in the company and quickly buy and sell their positions, marking a significant transition to liquidity for the shares. For private market investors, they offer the chance to sell their shares to the public market, potentially realizing investment returns. The realized returns for the private share holder can be subject to delays, for example, the shares could have a lock-up period – a window of time where the stockholders are unable to sell or redeem their shares. However, the IPO process is complex, involving regulatory compliance, market conditions, and precise timing—factors that can influence an investor’s outcome.

In an IPO, understanding market sentiment, assessing company growth prospects, and evaluating the right timing for entry or exit can be critical.

Mergers and Acquisitions (M&A):

M&A involves the consolidation of companies through various financial transactions. A merger occurs when two similarly sized companies that produce similar or complementary products combine entities. The resulting company can typically gain additional market share and become more powerful than each company separately. For example, in 2018, the Dr. Pepper Snapple Group, a public company, merged with Keurig Green Mountain, a private company in 2015. The transaction created the third largest beverage company in North America[1], and gave shareholders in Keurig $19B in cash[2].

An acquisition occurs when a startup is purchased by a larger or more capitalized company. This can help the acquiring company gain additional market share or bring steps of the production process in house. For example, SpaceX recently acquired the parachute company Pioneer Aerospace in November 2023, which already produced the parachutes for SpaceX’s Dragon capsules. The acquisition is expected to help SpaceX bring the parachute production in house rather than paying a premium to purchase the parachutes[3].

For investors, a company participating in M&A activities can present opportunities to realize returns, whether the company buys out the shares in the case of an acquisition, or the investor owns shares in the new entity in the case of a merger. Proper due diligence and understanding the long-term viability of the combined entity may help investors understand the opportunity if the company chooses to take one of these routes.

Secondary Buy-Outs:

Secondary buy-outs occur when an investor sells their stake in a company to another private equity firm. This strategy could allow investors to exit their investment while transferring ownership to a new investor, potentially at a higher valuation, however it can also be at a discount. It can facilitate monetizing the investment and reallocating funds for new opportunities.

Successful execution can involve thorough due diligence, understanding market appetite, and gauging potential future growth. Timing and assessing the buyer’s intentions can impact the success of this exit strategy.

Optimizing Exit Strategies for Individual Private Market Investors:

To optimize exit strategies, individual investors can adopt a proactive and strategic approach:

• Thorough Due Diligence and Strategic Planning: Conducting comprehensive due diligence on potential investment opportunities can be crucial. Investors may want to thoroughly understand the company’s financials, growth prospects, and market conditions to help understand which exit strategy a startup make choose to employ. Strategic planning can help investors be well-prepared for any potential obstacles or challenges during the exit process.
• Relationship Building and Networking: Building strong relationships within the industry and networks can help provide valuable insights and potential opportunities for exits. Engaging with industry experts, advisors, and other investors can uncover potential buyers or partners interested in acquisitions or mergers.
• Long-Term Alignment with Business Strategy: Investors may want to align their investments with the long-term business strategy of the invested company. Understanding which exit strategy a startup may take could help an investor in choosing to invest in a company that may eventually take their desired exit strategy.
• Flexibility and Patience: Unlike the public markets, exits in the private market often take longer due to the lack of liquidity. Investors should remain patient and flexible, understanding that the right exit opportunity might take time to materialize. Being open to various exit scenarios and maintaining flexibility can be advantageous in meeting investment goals.

Final Thoughts

While investors have little to no say in the exit strategy a startup chooses to take, investors may be able to find insight into which exit strategy a startup may take. Do they operate a part of the supply chain which may lead to an acquisition with a larger company? Do they operate in a similar space to an existing startup with could result in an acquisition? Or is the startup unique enough to warrant an initial public offering at some point down the road? There are many factors at play when it comes to exit strategies for investors and no matter which exit strategy a startup chooses, the potential for realized returns can exist.

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[1] https://investors.keurigdrpepper.com/2018-07-09-Keurig-Dr-Pepper-Announces-Successful-Completion-of-the-Merger-between-Keurig-Green-Mountain-and-Dr-Pepper-Snapple-Group

[2] https://www.investopedia.com/news/what-keurigdr-pepper-merger-means-beverage-giants/#:~:text=The%20maker%20of%20Keurig%20coffee,of%20Europe’s%20largest%20investment%20firms.

[3] https://techcrunch.com/2023/11/29/spacex-acquires-parachute-company-for-2-2m-because-it-turns-out-space-rated-parachutes-are-very-hard/

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.