Exit Strategies In Private Equity: Key

INTRODUCTION

Intheprivate equity (PE) investmentslandscape, successful exits are paramountto investors who are keen to recoup theirinvestmentandhelp position the company in a better waypost-exit.An exit strategy refers to how an investor plansto liquidate their investment in a company, either by selling their equity stake, through anInitialPublicOffer (IPO),andSecondary Sale,or otherexit means.Properly executedexit strategies are not only essential for investors but also beneficial for the company, as they often mark significant growth and success milestones for the company.

However,the exitenvironment has proven to be a persistent challenge forsomePE firmsto exit their investment, particularly in Africa, whereduring economic downturns or periods of market volatility,(such as forex risk, political instability,etc.)., investors experiencedincreased difficulty in finding suitable exit opportunities, leading to longer holding periods or lower liquidity.

This predicament was highlighted in a2021survey by the African Private Equity and Venture Capital Association (AVCA), whereseventy-one(71%)percent of LimitedPartners(LPs)identified the weak exit climate as the biggest challenge for investing in African private funds.Also, according tothedatafromAVCA,onlyseventeen (17)companies were sold byPEfirms across Africa in the first six(6)months of 2023,accounting forthe lowest in nine(9)yearsdespite some positive momentum in 2022,which recorded a total ofeighty-two(82)exits by the end of the year, the most since2009.These are not good signs for the Africa Investment clime to attract investors and calls for action to aid smooth and successful exits.

Though,in 2023, there has been a decline in global private equity exits,this has been due to economic imbalances in the financial economy of global economic powers orchestrated by highcredit andinterest rates and valuation gapsbetween sellers and purchasers.Nigeria has not been immune to this trend,issuessuchas;high interestrates, inability to repatriate foreign exchange(Forex) due to Forex instability,the devaluation of the Nigerian naira against the dollar,lack ofproperlegal guidance,and politicaleconomies(such as the last election cycle)andthe volatile nature of the currencyare major identified challenges, whichcreateuncertainty for investorsto exit.

Consideringthese circumstances, it becomesexpedientto address thekeyconsiderations for successful exits in private equityandproffersolutionsthat ensurethat investors navigate these challenges while maximizing their returnsgoing forward.

WHAT IS PRIVATE EQUITY EXIT?

A private equity exit refers to the process of selling or disposing of an assetin an investee companytogenerate returns on investment after a specificholdingperiod. In private equity,investorstypically hold onto their assetsininvesteecompanies, and they work towards increasing the value of the asset through operational improvements, streamlining product or service lines, restructuring the organization, and afterward, thePE investorseeks to part ways withthe investee companythrougheitherasecondarysale, IPO,orotherexitmeans.

The significance ofthis exitcan be attributed to several key factors. Firstly, a well-executed exit confirms the underlying value of the investeecompany,andthiscan attract further investments and helpraiseadditional capital for futureeconomicventures.

Also,a well-executed PE exitcontributes to the development and nurturing of the overall private equity ecosystem. When investors witness successful exits, it fosters confidence in the market and encourages more entrepreneurial activity.Moreover, PE exits offer investors the chance to strategically manage their investmentportfoliosasInvestors liquidate their investments to reallocate assets,gain liquidity, reduce funding liabilities, hedge their investments,and manage key limited partner (LP) relationships.

TYPES OF STRATEGIC EXITS IN PRIVATE EQUITY

In the Nigerian market, private equity investors have various options available for exiting their investmentsin investee companies.Theseoptions include trade sales to strategic buyers, secondary sales,IPOs, management buyouts (MBOs),schemesof arrangements, and share redemptions.Each exit option requires careful consideration.

• TradeSale orStrategicAcquisition: Thisis a popular exit route where the investeecompany is sold to another suitable company. Thepurchaseroften pays a premium for acquiring the business, as it may complement their operations. This type of exit constitutesabout fifty percent (50%)of exits, with regional and local companies actively pursuing pan-African expansion.
• SecondarySale: Thisinvolves the private equityfirmsellingitsstake in theinvesteecompany to a differentprivate equityfirm.The newpurchasertakes over the value creation processand galvanizes the turnaroundandrestructuring process of the company. In Africa, secondary sales arecommonandaccountformany PEexits.
• InitialPublicOffering (IPO): Thisinvolveswhere the PEexitsthe investee company public by opening its shares for the public to subscribe. Offering shares of a private companyto the public through a new stock issuance requires regulatory compliance and approval from the Securities and Exchange Commission (SEC). The investeecompany upon obtaining the SEC's approvalbecomesa public company and meet the listing requirements of the Nigerian Exchange Group(NGX)to be listed on the stock exchange.
• ManagementBuyouts (MBOs): Thisenablesthe sale of a portfolio company to its management team or senior employees. Although, this method israrely explored in the Nigerian market, an MBO requires approval from the acquiring company's management, sector-specific regulators, and the SEC in the case of a public company.
• Scheme ofArrangement: Thisis another exit option available to PE investors in Nigeria. It involves a negotiated arrangement between theinvesteecompany andits shareholders. PE investors with controlling shares may utilize this option when theinvesteecompany has a fragmented shareholder base. The scheme of arrangement requirestheinvolvement of the Nigerian courts and facilitates therestructuring of the equity anddebt betweenthe companyand its shareholders.

KEYCONSIDERATIONS FOR SUCCESSFUL PRIVATE EQUITYEXITS.

When planning a successfulPEexit in Nigeria, there are severalkeyconsiderations;They are:

• Exit Strategy:This involves determiningthe most suitable exit strategy for PEinvestors to consider when considering exiting.Exit strategy also concerns evaluatingthe legal implications and requirements associated with each optionand adopting the best possible route to exit.
• Shareholder Agreements:There is a need to review theterms and conditions of shareholder agreementsgoverning the PE investment,suchas;exit rights, tag-along, drag-along, and pre-emptive rightsto ensurethat there are no restrictive conditions against the exit and forcompliance with existing lawsconcerningthe agreementwhen executing the exit.
• Regulatory Approvals or sector-specific regulatory consent: Identification ofany regulatory approvals or notifications required for the exit processmustbe considered during exit. This may include approvals from the SEC,NGX, or other relevant regulatory bodies.This is to ensure that investee companies are not exposed to fines andsanctionspost exits.
• Compliance with Securities Lawsand Disclosure Obligations:Parties to theexitmust ensurethat the exit process adheres to NigerianSecurities lawsandregulations.The compliancealsoincludesdisclosure obligationsand requirements such as;providing accurate and timely information to shareholders, regulatory authorities, and potential buyers,adherence toinsider trading regulations, and any restrictions on market manipulation.
• Tax Considerations: Evaluatingthe tax implications of the exit, such as capital gains tax, withholding tax, and any tax incentives or exemptions that may be availablehelps a successful exit. This is achieved through seekingguidance from tax experts to optimize the tax efficiency of the exit.
• Due Diligence: Conductingthorough due diligenceontheinvesteecompany before the exit process to identify and address any potential legal issues or liabilities that may impact the transactionfurther helps a successful exit. A due diligence will ensure that teething issues surrounding the investee companies are identified andaddressed before the PE's exitfromthe investee company.
• Negotiation and Documentation:A PEinvestormustengage legal professionals toprovide adequate and sound legal advice concerning the exit as well asnegotiate and draft the necessaryaccompanyingdocuments, suchas;saleand purchase agreement, share transferagreement, shareholders agreement, and disclosure documentsand ensuringthat the terms of the exit are accurately reflected in the agreements.
• Dispute Resolution:DuringthePE exit process, there is always a potential for disputes to arise, to this effect, appropriate dispute resolution mechanisms in the exit agreements, such as arbitration or alternative dispute resolutionneedto be includedto resolve any potential disputes that may arise during or after the exit process.
• Compliance with Company Law:AbsoluteCompliancewith Nigerian company law requirements throughout the exit process, including shareholder approvals, director responsibilities, and compliance with statutory filing obligationsmust be adhered to in ensuring a successful PE's exit.

Therefore,religiousadherence to theabove-listedkey consideration will ensure that the PE investors'exit process is smooth and seamlessandthe investee companyisput ontheright sustainable growth for success upon the PE's exit.

NAVIGATINGCHALLENGESFACINGPRIVATEEQUITYEXIT IN NIGERIA

TheNigerianPrivate equity exits present various challenges thatinvestors mustnavigate to achieve successful outcomes. One significant challengeespecially in the year 2024is the uncertainty and volatility of market conditionsand foreign exchange, whichcan impactthevaluation, demand, and attractiveness of portfolio companies. To overcome this,investors needto closely monitor market conditions, adapt their exit strategy, and ensure portfolio companies are well-prepared with strong financial performance and governance structures.

Further, there is a needto alignthe interests of different stakeholders involved in the exit process. Conflicting expectations and incentives can create tensionsduring the exit process.Thus,clearand transparent communication, mutual trust, and appropriate incentive schemes can help overcome this challenge and align the interests of fund managers, investors,investeecompaniesand every other stakeholder.

The execution of the exit itself poses another challenge. Managing various tasks such as engaging exit partners, conducting market research, negotiating exit terms, and facilitating due diligence and closing processes can be complex andtime-consuming. A clear exit plan, allocation of sufficient resources and expertise, and maintaining a constructive relationship with exit partners are essentialsfor successful execution.

CONCLUSION

Private equity exits come with challenges that require careful navigation.During the exit process, certain key considerations such as tax, due diligence,compliancewith relevant laws, regulations,andregulatory approvals are significant ina smoothexit process.

Also,monitoring market conditions, aligning stakeholder interests, ensuring exit readiness, and executing the exit plan effectivelyare neededto overcome these challenges and achieve successful exits, especially in 2024 and going forward.

Thus, while adopting the issues outlined above,it is recommended that PE investors exiting an investee Company should also considertheverylong-termsurvivalplanof the investee companies through apost-exitsynergy,tomaintain operational solidity and efficiency upon exit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.