Given this year’s challenging exit environment, private equity firms are leveraging legal technology, data analytics, and AI to prepare for the right exit opportunity.
It’s no secret that recent years have been tough on the private markets. According to Preqin data, 2023 saw only 1,962 global PE exits, similar to 1,959 global PE exits in 2022. Trade sales accounted for more than half of all exits (1,017), while secondary sales were the next most popular exit last year (674). IPOs by private equity-backed companies in 2023 were at their lowest since 2019, with only 72 public offerings.
That said, private fund managers willing to adapt to current market conditions and ready to tell a strong equity story will be the first in line for exit opportunities. To adapt and craft strong equity stories efficiently, managers must leverage AI-powered legal tech like Ontra’s private markets technology platform.
What is a private equity exit?
An exit refers to a PE fund parting with a portfolio asset — such as through a strategic sale, IPO, or continuation fund to realize a return for that fund and its LPs.
Why are private equity exits challenging right now?
A number of economic and geopolitical factors are making exits particularly challenging, including:
- High interest rates have increased the cost of financing.
- High inflation has squeezed profit margins, making some businesses less attractive to buyers.
- The ongoing risk of recession has made buyers cautious.
- Geopolitical tensions have stressed supply chains, and some buyers are waiting for more stable conditions.
It’s no wonder that many buyers have continued to delay acquisitions this year. As challenging market conditions continue, sellers must adapt to exit strategies that provide the most value for their LPs. For example, continuation funds offer liquidity while giving GPs more time to drive value at a portfolio company.
Top private equity exit strategies
Strategic Sale: The sale of a portfolio business to a corporate buyer, typically a business in the same industry that hopes to incorporate the target company into its business.
IPO: The placement of a company on a stock exchange for the first time and the sale of stock units to the public.
Leveraged Recapitalization: The portfolio company raises debt and restructures its capital to repay loans and preference shares.
Secondary Buyout: The sale of a portfolio company to another PE fund or financial sponsor.
Continuation Fund: A GP-led secondary sale of a portfolio company to another fund by the same GP.
Partial Sale: The sale of part of the GP’s stake in the portfolio company — usually as a secondary sale.
How are GPs preparing for exits?
Typically, GPs begin to consider an exit 12-18 months ahead of their deadline or ideal exit timeline.
Preparing for a PE exit requires an enormous amount of data collection, analysis, and documentation. To prepare a clear roadmap for a prospective buyer’s opportunity, GPs:
- Assess growth measures for the portfolio company
- Document the success of growth measures
- Consolidate data
- Demonstrate tangible EBITDA impact
- Prepare for diligence requests
- Prepare for valuation
Through these steps, a GP crafts a compelling narrative to provide prospective buyers. The equity story demonstrates the portfolio asset’s current and potential value, giving a potential buyer a clear roadmap and confidence in its ability to continue to grow and benefit from the asset.
Navigating an exit with Ontra’s private markets technology platform
Atlas
Atlas is a modern entity management solution that consolidates entity information — creating a single source of truth to support diligence and provide information to prospective buyers. During an exit, Atlas is a valuable tool for creating entity charts and updating director & officer (D&O) slates. By relying on Atlas’s automatically generated structure charts, GPs can visually reflect the new ownership of the underlying assets and monitor capitalization. Additionally, Atlas can help streamline diligence- and KYC-related tasks by providing swift access to an asset’s articles of incorporation, D&O slates, structure charts, and more.
Insight
Insight is the platform powering the private fund lifecycle and simplifying compliance. By digitizing side letters and other fund documents in Insight, GPs can transition to a centralized and searchable digital compendium. GPs can review an existing LPA and side letters in Insight to determine if a particular exit strategy triggers additional obligations — such as a notice or consent requirement. In the case of a continuation fund, GPs and their outside counsel can use Insight to streamline the negotiation of new side letters, run MFN elections, and manage ongoing compliance for the new fund.
A GP acquiring a target company in a secondary transaction can use Insight to search its side letters for particular obligations and restrictions. Insight’s semantic search capability uses AI-enabled technology to understand the intent and context of a search and forgive misspellings and typos, helping deal and legal professionals quickly surface relevant information across fund documents.
Contract Automation
Contract Automation is an AI-powered contract negotiation platform that streamlines the negotiation and execution of routine legal agreements, such as NDAs for an auction or new LPs joining a continuation fund. By using Contract Automation, GPs can streamline negotiations, improve the quality and consistency of their agreements, and reduce costs. For instance, during an auction, dozens or hundreds of potential bidders must complete an NDA before accessing diligence materials. The GP or investment bank running the sale process can drastically reduce the time it or its outside counsel spends on NDAs, lower costs, and improve visibility into active counterparties using this NDA process.
Prepare for your next private equity exit with Ontra
Interested in leveraging Ontra’s AI-powered technology platform for your next exit? Schedule a personalized demo today.
