In this article, Mansi Saxena, discusses exit Strategies for Private Equity Investors.

INTRODUCTION

For periods private equity (PE) is the motorist of growth. Evolution and Productivity are the chief goals of this industry. Private equity is capital that is not noted on a public exchange and invest in established industry which are not performing well or going through bankruptcy. There are primarily five systems of PE, Venture Capital, Growth Capital, Leveraged Buyout, Mezzanine Debt and Distressed Debt. Private equity are the firms which are composed of funds and investors that directly invest in private company or acquire the ownership of a company through institutional and retail investors. But on the other hand there is Venture Capital which is a form of private equity, which invest in a new enterprise and unknown technocrat, who possesses innovative ideas to develop new product, but lacks his own capital which is essential to turn his ideas into successful commercial venture. Venture Capitalist comes to his rescue by providing risk bearing capital, which is widely known as Venture Capital. These Institutional and retail investors provide capital for the private equity, and the capital can be utilized to endowment new technology, expand working capitals or to coagulate a balance sheet.

Venture Capital may be broadly defined as long-term investment in business which has potential for significant growth and financial returns. This is usually provided in the form of equity apart for conditional loans and conventional loan. Venture Capitalist is thus not financier only, but bears the risk as well.[1] Private equity organizations are the firms which increase assets from foundations which comprises, insurance companies, pension funds & others. These also include wealthy individual. The money is then invested in buying and selling businesses.

VENTURE CAPITAL/PRIVATE EQUITY FUND IN INDIA

Venture Intellect, 2015 so far has stood the best year for ‘exits’ by the Private Equity and Venture Capital investors. The Private Equity organizations departure their funds in a company through routes like an initial public offering, selling to another private equity firm, a trade sale or a company buy-back. Sector-wise, companies in the Telecom, Media & Entertainment industries and IT & ITES, BFSI, have managed the list of successful departures till July this year[2]. Private Equity investors have also gained ironic earnings so far this year by selling their stakes in publicly listed Banking, Insurance industry (BFSI), Financial Services and companies. Private Equity and Venture Capital investors also sold shares worth USD 1.9 billion in already listed via the public markets, in the first half of 2015. With number of Private Equity-backed Initial Public Offerings picking up, the exits via Public Market Sales route is expected to exceed the previous high by year end[3].

EXIT ROUTES FOR PRIVATE EQUITY/ VENTURE CAPITAL

Private equity investors and venture capital investor, at the time of their entry are already ready with their exit plan an investors never plan a long term or forever mutual relationship with the company. An exit strategy is a prospect plan that is achieved by a venture capitalist to discharge a position in a monetary benefit or dispose of palpable commercial assets once sure prearranged criteria for either has been met or exceeded. Private equity/Venture Capital investors, at the time of entrance, must be very vibrant about their exit decisions. In fact, information of exit options is a necessary concomitant of entry. Profits collecting to private equity depositors pivots on their footings of exit and therefore the investors want to be prepared right at the outset. An exit policy may be made for the purpose of exiting a non-performing investment or ending a business that is not upbringing profits. In this case, the purpose of the exit strategy is to limit losses. An exit stratagem may also be executed when an asset or business venture has encountered its profit objective

A latest growth that has made private equity investors cheer, is the Bombay High Court decision in Holdings Ltd. v. Shyam Madanmohan Ruia[4]. Different decisions of various courts in the past, the High Court in this decision has upheld the enforceability of all private arrangements including a ROFR and ROFO and the principle of the sanctity of consensually executed shareholder agreements[5].

MODES OF EXITS

Initial Public Offering this is the usually preferred route. Private equity investors will have a right to bid their shares for sale under an IPO and then exit

Initial Public Offering

Once the bonds of the investee company are listed on the stock exchanges and are cited at a premium, the venture capitalist offers his holdings for public auction through public matter. The profits of an Initial Public Offering are ostensible is advanced valuation can be attained so long as the markets are buoyant, administration will cooperate since they can remain in operative control and the investor can select to advantage from a longer term shareholding in the company. The main difficulty is that valuation is dependent on prevailing market conditions. An Initial Public Offering involves substantial transaction costs; the transaction entails, watchful planning and the practice takes long to implement, during which period, a drastic change in market changes may warrant abandonment of the project.

Sale of Enterprise to another Company

Venture capitalist and Private Equity can recover his investments in the investee company by selling the holdings to outsider who is interested in buying the entire enterprise from the entrepreneur.

Sale of Enterprise to another Company

Venture capitalist and Private Equity can recuperate his investments in the investee company by hawking the holdings to outcast who is attracted in purchasing the entire enterprise from the entrepreneur.

Buy back of Shares by the Promoters

In terms of the agreement entered into with the investee company, promoters of the company are given the first opportunity to buy back the shares held by the venture capitalist and PE, at the prevailing market price. In case they refuse to do so, other alternatives are resorted to by the venture capitalist.

In decision of the Bombay High Court in Niskalp Investments and Trading Co.Ltd. v. Hinduja TMT Ltd.[6] , a buy-back or put option of shares of a public company, whether listed or unlisted, can be construed to be a transaction in securities, not being on a spot delivery basis (as required under the Securities Contract Regulation Act, 1956 or SCRA) and hence void and unenforceable[7].

Liquidation of the Investee Company

If the investee corporation does not become profitable and grieves losses, the venture capitalist and Private Equity options to recover his investment by negotiation or settlement with the businessperson. Failing which the salvage is done by means of winding up of the enterprise through the court.

Self-liquidating Process

In case of debt financing by the venture capitalist and Private Equity, the process is self-liquidating in nature, as the major amount, along with interest is realized in payments over a specified period of time.

Sale to New Venture Capitalist

A venture capitalist and Private Equity can vend his equity properties in the enterprise to a new venture capital company, who might be attracted in buying the possession portion of the venture capital. Such sale may be suffering sale by the venture capitalist to realize the moneys and exit from the enterprise.

CONCLUSION

The exit strategy is the most important while planning to invest in any of the organization, organizing and recording the exit terms achieves a focus-driven operation of the investee company and if all goes well, one will see private equity investors arrive, alter and departure happy. One can surmise that considering the pros and cons of the numerous exit routes, while bearing in mind the nature and reasons of the private equity investor is critical to achieve the expected return on exit. The great is the exit than the better is the return on investment for a venture capital and private equity investors.

References

[1] Unit 18 Venture Capital, Fund Based Services, IGNOU

[2] http://www.slideserve.com/davis/private-equity-the-latest-in-indian-financial-resource

[3] THE HINDU Article “Exits earn Private Equity and Venture Capital investors record $6 bn in India”

[4] Appeal No. 855 of 2003 decided on 1-9-2010 (Bom)

[5]http://www.supremecourtcases.com

[6] (2008) 143 Comp Cas 204 (Bom)

[7] http://www.supremecourtcases.com