Investment Process
INVESTMENT EXIT In principle, PCFs and SIFs have the same exit routes available to them, although constraints may exist depending on the financial markets within which the SIF operates. From a governance standpoint, the decision-making body in charge of the initial investment decision is usually tasked with approving the exit as well. The investment team is responsible for executing the exit transactions, for instance, by negotiating deal terms and related documentation. Exit decisions are usually a function of the portfolio company’s having achieved the expected operational plan and exit market conditions.11 PCFs and SIFs frequently base exit decisions on whether they have hit an internal rate of return or return on investment target, or if there is investor pressure to return capital. 12 Certain exit routes—particularly initial public offering (IPO) and sale to a financial buyer— may not be available in emerging market and developing economies that lack sufficiently developed financial markets. The following exit routes are available for private equity investments made by PCFs and SIFs alike: • Strategic buyer. Sale of the portfolio company stake to a strategic buyer—that is, another company operating in the same or a related industry. • Financial buyer. Sale of the portfolio company to a financial buyer, usually another private equity investor. • Co-investor. Sale of an equity stake to a co-investor, usually according to provisions of the shareholders agreement (for example, exercise of put option). • IPO and follow-on offerings. In this scenario, the portfolio company is listed on the stock exchange. The fund sells part of its stake at IPO, committing to retain the remainder for a lock-up period stipulated in the IPO documentation. Once the lock-up period has expired, and subject to market conditions, the fund is free to sell the remaining stake in one or more follow-on offerings. Public offerings are “slow-motion exits,” often occurring over multiple years and leaving investors exposed to stock market fluctuations while they still hold an interest in the company (Bain & Company 2019). • Dividend recapitalization. In this scenario, if credit market conditions are favorable, the portfolio company refinances its existing debt with a larger debt package and uses the proceeds to make large dividend payments to the fund or shareholder, allowing the fund to take money off the table (Bain & Company 2017). This strategy is particularly suited to businesses in sectors, such as infrastructure, that generate cash flow. As pursuers of a double bottom line mandate and providers of patient capital, however, SIFs are driven by additional considerations when deciding on exit routes. These considerations include the following. • The ability to hold on to their investments longer. As discussed in chapter 5, public capital SIFs in particular tend to have longer investment horizons than equivalent PCFs, in line with their mandate to be providers of patient capital. As a result, SIFs may invest in companies and projects that require a longer gestation period, as exemplified in particular by greenfield infrastructure investments. Unlike private equity funds that typically operate through a finite life fund, permanent capital structures often employed by public capital SIFs are not constrained by the need to exit by a fund life cycle deadline. • Demonstration effects and validation with private investors. In pursuit of their double bottom line and as sources of additional capital, SIFs can invest in
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