Private equity's 'magnificent seven' exit-strategy principles
A good private equity deal is not done until the exit is complete and the money placed under the mattress, according to Jean-Eric Salata, the CEO of Baring PE Asia.
He was speaking at the Asia Private Equity Forum in Hong Kong last week, and pointed out that an amount equal to about half of the private equity funds raised and invested in Asia in the last five years has been returned to investors. The rest is fermenting and being marked to higher theoretical IRRs in the fund portfolio.
He provided a number of ‘exit philosophies’ for the audience. He started off with six tenets, then thought of another one while at the stump, making up a magnificent seven.
His exit principles are as follows:
1) Take money off the table. Sell often and early. Be satisfied with a good return. Don’t be a greedy pig and hang on in the hope of a six-bagger.
2) Sometimes a 1x return (i.e just the return of your capital) is not bad, if it turns out that your investment thesis was flawed. Don’t spend excessive time trying to fix an investment in this position. Salata has in the past and regrets wasting that precious time.
3) Pay attention to the cycle. Price/earnings multiple expansion is not infinite.
4) Manage the relationship with the founder. He may get upset when you declare that it’s time to move on. You have to mollify him so he doesn’t take it personally.
5) Be watchful of your portfolio construction. Some deals are long term and some are short term. Some deals give you control, others don’t.
6) Devote as much time and analysis to the sale as you did with the decision to buy initially.
7) Expect more of a weighting to trade sales during the next five years, compared with the bias (in the past five years) towards IPO exits.
Baring PE Asia has assets under management of $5 billion and focuses on mid-market companies of $100 million to $500 million in size. In its 13-year track record it has realised cash of $1.2 billion at an average multiple of 3.3x and an IRR of over 30%.