Private Equity Exits: Strategies For Maximizing Returns In 2024 An essential element of a successful exit strategy is crafting a compelling narrative around the business

By Mohit Ralhan

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In the dynamic landscape of private equity, the spotlight often gleams on selecting the right investments and optimizing operational efficiency. Volumes of literature can be found on the art of identifying promising ventures and enhancing their intrinsic value. Yet, a crucial chapter in the private equity playbook often remains understated—the art of exits.

TIMING IS CRUCIAL

Timing is the most crucial factor in attaining a target return. There can be a huge variation between valuation multiples during market peaks and bottoms. The effect could be even more pronounced in the case of cyclical industries. Investors, who can accurately gauge market sentiment can achieve higher returns by exiting their investments at higher multiples. To achieve this the deal-making team should continuously monitor the macroeconomic and industry landscape as well as the operating history and future growth prospects of the company. There must be a growth runway left for the incoming buyer of the company and the exit must happen when the growth graph is still in the upward trajectory.

KEY ROLE OF MACROECONOMIC FACTORS

Macroeconomic factors also play a critical role. As of today, central banks across the globe have hit a pause on the tightening cycle. The US Fed is expected to cut interest rates next year. Fears of a deep recession in the developed world have also been waning. Amidst this positive backdrop, transaction activity in the unlisted space is expected to recover. PE funds looking to exit could command higher valuation multiples on their investments if they wait for the right time. Of course, this can only be achieved if the business can sustain itself without any significant reliance on external financing. While preparing for exit, the PE fund should continue to work towards improving the underlying profitability of the business.

An essential element of a successful exit strategy is crafting a compelling narrative around the business

NARRATIVE AROUND THE BUSINESS

This narrative should not only highlight the historical performance of the business but also provide a comprehensive view of its fundamental value proposition to potential buyers. For instance, in the case of software companies, sellers can showcase opportunities for the new owner to convert non-paying customers to paying, emphasizing the potential for revenue growth. Similarly, for direct- to-consumer brands, detailing how production costs can be optimized at scale becomes a persuasive aspect of the business story.

Tailoring this narrative to potential buyers is equally crucial. Understanding the interests and motivations of different buyer types, be they institutional players or corporate acquirers, allows for a more targeted and effective storytelling approach. While another private equity player might look at the more near-term operating levers in the business, a corporate acquirer might take into account longterm synergies with their operations. The asset's storyline should align with the buyer's objectives, creating a seamless transition.

EVIDENCE BASED SELLING

In an era where data reigns supreme, evidence- based selling is paramount. Private equity firms must substantiate their claims with data points that support the asset's performance and potential. Whether it's showcasing management initiatives to enter new markets or launch new products, the narrative should be grounded in real evidence. Moreover, transparency is key.

In essence, as the investment landscape continues to evolve, private equity success will not solely be defined by the selection and improvement of investments but also by the finesse with which exits are orchestrated. The success of exits hinges on a combination of the fund managers' ability to read the market sentiment and deliver a data-backed compelling story on the underlying business.

Mohit Ralhan

CEO, TIW Capital

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