Running for the exit?

John Bakie
11 October 2010

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Exit numbers are set to boom in the coming months as market conditions improve, according to research. While trade sales are very much the preferred route for private equity investors, IPOs remain unattractive. John Bakie gives an overview.

Research among GPs conducted by Grant Thornton suggests large numbers of private equity portfolio companies will be sold over the next 12 months. unquote" research has also noted a growing number of exits in recent months, though it is not yet clear why so many funds are selling up.

Grant Thornton's research found more than two-thirds of private equity professionals expect to exit as much as 50% of their portfolio companies over the coming year, while just 10% do not expect to make any exits. Trade sales are likely to form the bulk of exits, with 76% saying they expect to sell at least one company via this route, while IPOs were the least favoured, 14% planning an IPO in the next 12 months.

The IPO market has been shaky so far this year, with volatile conditions in public markets across Europe. This is evidenced by a number of IPO plans having been shelved since the beginning of 2010. Grant Thornton's head of private equity, Mo Merali, says: "Volatile financial markets have led to fragility in the IPO markets, which in turn have had an impact on valuation expectations and deliverability for exits. Such a trend is evident in the aborted IPO plans of many private equity-backed companies, including New Look, Merlin Entertainments, Pets at Home and Jimmy Choo earlier this year"

While rising exits might suggest conditions are improving overall, there is also a risk that private equity investors are feeling they are pushed into exiting as their funds' lifespans come to an end, and LPs start asking for their money. Merali says many corporates now have stronger balance sheets than they did a year ago, allowing them to make acquisitions to benefit their business in the long-term, but also acknowledges the pressure faced by many GPs. "There is an over-riding strategic need by PE firms to show exits; this is two-fold in that they need to bring returns to their LPs and they need a track record of successful investments to raise new funds."

unquote"'s own figures show an increase in the number of exits so far in 2010, up 18% over 2009, hitting 185 with three months still to go. With many firms recently announcing plans to sell portfolio companies, it seems 2010 is presenting more exit opportunities. However, with over 450 exits recorded in 2007, the market is still a long way from major recovery.