The Exit Playbook: Right-timing the exit

0:00You need to have that perspective that says, what are they going to find when they scratch the surface and they question how rosy this or that projection is. A big part of modern exit prep is reducing the friction and diligence. When it comes to quality of earnings, it needs to be very clean. When we buy a business, we buy it for an indefinite timeframe. And we want to treat it like we're going to hold it forever. Welcome back to Disruption Matters, a podcast miniseries produced by Private Equity International in partnership with series sponsor Alex Partners that delves into the forces that are reshaping our world and how the private markets can only address these changes, but emerge stronger from them.

0:39I'm Rob Kotecki, a deputy editor with PI Group and your host. This is a six-part miniseries, and we'll be releasing a new episode here on Spotlight every week. But if you'd rather not wait, you can listen to the whole series right now. Just follow the link in the description. If you already have a Private Equity International account, simply sign in or register for free to access all six episodes. It's our fifth season, and our aim here is to offer an exit playbook, a series of strategies and tactics from industry leaders on how to find a route to that impressive IRR and a track record that woos LPs back for the next one.

1:13Investors still seem bullish on private equity. PI Group's recent fundraising tally for North America in the first half of the year found a 9 % increase in capital raise compared to the same time last year, with a grand total of$308 billion. But fund closings are down 9%, which means there's a disparity between what GPs expect and what LPs are willing to offer, especially now. This past July, the Wall Street Journal offered its own expose into so-called zombie funds, where GPs struggle to sell the last remaining assets of a fund and shuffle along for years after they should have closed. Here at PEI, we've been looking at the phenomenon for some time now, and it's one of the reasons we decided to focus exclusively on exits this season.

1:50No one wants a zombie in their closet or their track record. So far, we've spoken about the foundational principle of keeping the buyer's POV front and center, and then offered ways to maintain that perspective at the very start of the deal. But today we get down to the exit itself, and perhaps the trickiest element of it, the timing. Most agree that the process, once begun, takes between 12 and 18 months, but when do you begin? My sense is that a lot of managers would prefer a hard and fast recipe, like for cooking quail. This is the prep, this is the time of the oven, this is when it's served.

2:19Or, in a perfect world, they'd like to say it with me.

2:26Unfortunately, the reality is the opposite. There's a need for constant vigilance over the course of the investment. Today, we'll be looking at the trigger points the managers can look for when considering if it's time to begin the exit process. Naturally, one trigger point might be a particular EBITDA achievement, but even that isn't so simple. Here's Neil Cavalage, a senior managing director and head of portfolio operations at Centerbridge. So usually in our investment thesis, there's obviously something we're trying to do with the company. In addition, oftentimes, than just growing EBITDA. It might be we're trying to divest a certain piece of the business and make it more focused.

3:01It may be that we're trying to open up new growth paths either through adjacencies or into different geographies. It could be that we have a roll-up strategy where we're trying to create a certain engine around M &A. And so what we really think about is when are we far enough into that value creation plan that the results are proven and yet there's still more upside left for the next buyer. And so there's a sweet spot, right? Sounds simple enough. But let's put that moment in the context of the life of the entire investment. Here's Adrian Letts, managing partner and head of business operations at Brookfield's Private Equity Group.

3:36If you think about the life cycle for us, a lot of the near-term effort in the first 12 to 24 months is just that establishment. It's optimizing pricing. It's improving the operational efficiency. It's tackling things like procurement, ERP modernization, the scalable operating model that we're seeking that is foundational to then start to really drive the top line. And I think when you can start to see momentum in a business where you've solidified the platform level capabilities and you are starting to see that top line grow where you are winning volume, winning market share and being much more competitive and the competitive intensity is coming through.

4:20So that's a signal where you should start to think about, look, is this time for exit? Because what you're allowing the next buyer to capitalize upon is all the work that you've done and maintain the momentum through on the other side. That can work wonderfully, but there's a pretty important caveat here. Do all those accomplishments match the story you're planning on telling a potential buyer? Let's hear from Alex Greenbaum, partner and head of active core infrastructure at EQT. If you're selling a growth story, is that pipeline lined up? If you're selling a yield growth story, have you turned the business into a super safe, stable, yielding business?

4:59I think when you have mixed stories, when it's kind of, hey, we're in mid-transition and we're exiting this non-core piece, but hey, don't worry, it'll be gone in a year. Buyers really struggle with that. They don't want to take that risk. So I think you really want to get the business into as clean and stable of a position as the story can allow you to be. That relatively clean story can still run into trouble. Here's Ricardo Basile, an operating partner and head of value creation at Premier. Sometimes you have done great. The results are dead. The VCP is being delivered. It's an obvious buyer.

5:34It's an obvious asset for strategic buyers to acquire it, but they can't because, I don't know, they had a bad quarter and the share price has tanked or there is the the ceo was fired and the new ceo cannot go and do acquisitions straight away after the first three months in the firm so we always look at how you build optionality especially when the exit is either strategic or p how do you build optionality so that you're ready to move if the opportunity comes or you keep driving value creation one thing that we do is you know we build the value creation practically every year we rebuild it every year.

6:10I want always the portfolio companies to be fed with incremental value they can add so that every year the bar continues to grow. This vigilance was one of the most consistent themes in timing. Here's Fahim Ahmed, the COO of BC Partners. We have a process whereby each of our assets comes before what we call a portfolio review committee, which I chair at least twice a year. And that's meant to be effectively a full re-underwrite. And it is meant to be both a intervention decision-making body. So, okay, what can we do to help make this investment better, go to plan better than plan as it may be, but back to the point on exit.

6:50It's really a hold-sell decision-making body. And the way we try to think about it is the old investment adage of holding is buying at today's price. And so that requires a genuine assessment as best as we can in a relatively short period of time. How is the company doing? And what is its actual prospect for exit at this moment? And that's really what informs the idea of do we try to press go on launching a process at that moment? And some firms are even deploying AI in this constant re-evaluation. Here's Maurizio Mussi, a partner at Bain Capital and head of the portfolio group for PE in Europe.

7:27It's essential to build proof points over a long period, not just six to 12 months before a sale. And therefore, we invest significantly early on into what we call the visibility and insights engine, an analytical AI power platform which helps management and us keep track of all the key operational metrics, I'm talking OE, customer churn, the deal product margins in real time. And it's a powerful management tool for the transformation. And it's a powerful sales tool for exit. When buyers can see the operating discipline, the long auditable track record, they can immediately connect the equity story to the actual value creation.

8:09As we said, nobody is setting and forgetting anything these days. But it's not just about a consistent story. It's about one that can resonate. Here's Lane McDonald, the Managing Director for Operations and Strategy at Omer's Private Equity. Usually we'll have, you know, kind of a banker, probably not the banker that brokered the deal, but a banker come do kind of 20 minutes on case studies of what's selling in the market and what's not. And obviously this is of that point in time, but we find it useful as just, you know, drawing three or four different pieces of data that say, OK, here's what sells in the market.

8:41And equally importantly, here's what doesn't sell in the market. Nowadays, gauging the right time isn't just about the right moment for that particular investment. Here's Ricardo from Premier. So until two years ago, the exit decisions were taken individually by each deal team looking at the performance of each portfolio company. Now instead, once a year in March, we looked at all of our mature portfolio companies. So anything that we've owned for more than a year. And we reassess the sell versus hold view based on individual performance, future planned performance, but also looking at fund construction, DPI, DPI they want to return.

9:25And that is driven significant, more structural and strategic approach to exits compared to years before. Premier isn't alone on this point. Here's Jerome Lawson, a partner and head of portfolio operations for PE at Ambienta, cutting to the heart of the matter. If you oversee the overall portfolio investments of a firm or contribute to discussion about how you manage that portfolio, generally you think about how the portfolio is evolving over time. And that can trigger a conversation about how one asset could be monetized or one asset could lead to a realization because it's good for the fund overall.

10:01At the end of the day, we are paid by LPs to return on the basis of fund performance rather than individual asset performance. Evidently, individual assets contribute to the former. Timing isn't just about the numbers. It's about the people, according to Baines-Morizio. You can't fix the team at Exit. It's something that you need to build and engineer at the start, also for a robust value creation. We back strong CEOs and management teams, but we often acquire businesses when funders or family are departing, or we need to step up significantly the capabilities to fulfill that initial bold ambition.

10:39And in every investment, we front load the capabilities building. So by the time we are settling, the team is proven and aligned. One example in an healthcare investment I've been working on, we have hired almost 50 % of the top 150 new critical roles in the business in the first 24 months. Many of which are new capabilities really needed for the value creation in the journey. And that is going to be very important for that team to settle, glue together and be effective over the longer term. Up until now, we focused on all the elements manager can control. But we all know that exits are sensitive to plenty of factors that they can't, like the health of overall markets.

11:18Here's Jerome again. Some of those markets are, the appetite for some of those markets can be either cyclical or, you know, just non-stable. you're not in stasis in these environments. And so these considerations about the quality of the market environment in which you want to go to market matter. Let's say the story is one that does resonate with markets and the climate appears inviting. There's still the matter of ensuring that the story holds up to scrutiny. Here's Helen Lee Pugies, an operating partner at Ardian and a member of the firm's management committee for buyouts. When it comes to quality of earnings, it needs to be very clean.

11:52There's no excuses. There's no forgiveness in today's market. in terms of when you have sort of sloppy, how you reclassify things, you know, you'll get zero credit for it. So that's one thing, which requires by nature, better preparation, even of your, you know, office of the CFO kind of financial department of your portfolio companies. Chris Tabor, a partner and managing director at Alex Partners, has seen for himself how stories can get inflated along the way. I had a deal a couple of years ago where it was a corporate looking to sell a division of their company and it was a target that would have been great for a private equity hold.

12:31But their buyer simulated diligence that they had done was way too deferential to the management team and their enthusiasm for the product. And this is a product that was going to change the world and literally cure cancer. And so it's very tempting to want to believe that story. But you also have to assume that your prospective buyers are going to hire the best security firm out there. And you need to have that perspective that says, what are they going to find when they scratch the surface and they question how rosy this or that projection is? How much stock do we need to put in the mid case or the down case and not just believe the up case here?

13:14And really make sure that that diligence that you're doing proactively earlier on to really gauge the progress of your value creation, to gauge how much is left in the tank in terms of the growth story is actually achievable and is achievable by the target buyer. Assume that that target buyer is going to have the sophistication to be able to do what you've been able to do while you held it. In short, a great story for a buyer is as much about the company's future as its past. Here's Ricardo from Primera. You don't want to sell, at least in our opinion, the best multiple, the best EV that you gain from your companies by selling them, not when they're at a thick performance, when it's only downhill from then, but actually when there is clarity on how you can accelerate further for the next guys after.

14:02Whether it's strategic, because the quality is there, or PE, because the financials are there. All this argues for a deep dive into these questions before any exit process commences. Here's Alexis Underwood, a partner at the Midmark industrial firm, Windchurch. I think the true kind of operational exit prep to me realistically begins about 12 to 18 months before a process. And I typically think of the first phase is kind of a diagnostic phase that can be very valuable because it can kind of force everyone to evaluate the business through that external lens rather than the internal lens that you've probably been focused on up to that point.

14:40And to me, that's often when you can discover like where some of the friction really exists. So things like inconsistent KPI definitions or gaps in historical reporting, weak forecast discipline, or poor pipeline hygiene in the sales world. Alexis explains that performance matters, but this diagnostic isn't limited to that. And sometimes I think it's interesting that the business is actually performing very well operationally, but the evidence hasn't necessarily been organized in a way that makes underwriting easy. And I think that's an important distinction because it feels like a big part of modern exit prep is reducing the friction and diligence.

15:22And so getting to things like more standardized reporting, cleaning up commercial dashboards, tightening that forecasting process, building a cleaner margin bridge, not to get perfection, but to get that credibility and clarity. In short, managers don't need to simply accomplish their investment case, but they have to ensure that they can effectively educate buyers on what they've done, which can take time. Here's Helen from Ardien again. There's a large period of more of an education period that you need to do. And unfortunately for management team, it takes a little bit of time for them, but there is a bit of a pre-sending out the teaser, an education period in order to really garner interest already, because it doesn't make sense anymore to send out 40 different teasers to a whole bunch of sponsors or strategics.

16:18It is much more of a targeted approach because ultimately you want to have at the end of the process, serious, serious buyers looking at it between three to five. I think that's a realistic kind of statistic that we're seeing when you have a really excellent sale process. That education extends to cybersecurity and IT capabilities. Let's hear from Megha Kulsi, a partner with the cyber team at Alex Partners. That readiness checklist should have, you know, are we telling the right story? Are we preparing our people from a cybersecurity perspective and tech perspective to be able to go through the story of how, you know, when we first started, we started here.

17:04And this is how we've started, you know, maturing from a cyber perspective. Let's say even, you know, you have AI driven solutions or product, how is product security being handled and so on? And not only that, but the cost associated with it. Right. So you're going to the world and technology is always changing. So how has the cybersecurity program kept up and what does that story look like and what's left? Right. You want to prepare your people to make sure that, you know, cybersecurity is not the deal breaker. It can be a deal maker and it can also be and it just it's just all matter of how you communicate it.

17:43And it's not merely about cybersecurity, but the company's own AI initiatives and vulnerabilities. Here's Stuart Walker, a partner at Synven. We run a mock vendor due diligence exercise. And in my case, especially focused on technology and AI. and in that process, I play a neutral objective role, often outside of the core deal team. And we're applying the same scrutiny as we would do if we were on the buy side, asking ourselves, is the business defensible? Is the AI strategy robust? Is the impact real? Is the data good? Is the team good? Where are there risks? What are competition doing? Can an AI native replicate parts of the business.

18:25And this is really critical that we do this well ahead of exit. When we sold a software business recently with all of the scrutiny of AI's impact on software, it was critical that we were able to surface every difficult question on our own timeline and that we were able to address product questions well ahead of the process and really be able to pre-seed with buyers that our product was not going to be AI disrupted and would it be able to benefit and that those messages were clear and the perception around the asset was positive. And having done that work up front was really critical in enabling us to launch a process at this time and get a successful multiple and outcome through that process first time around.

19:12Why not look at a case study that demonstrates a lot of this advice? Here's Doran Grossman, a former CEO and operating partner. I was the board member and a CEO of an infrastructure business for seven years before we sold it to a strategic. And those tend to be reasonably long holds, but there were things that the board said needed to get done in order to create a successful exit. And the first was, you know, the contracts tend to be five to seven year duration. So we needed to make sure that there was no contract with a customer that was going to expire in the next year or two that the new buyer would have to deal with.

19:48So really getting grounded on extending the contracts with any contracts coming up for renewal so the buyer's got the assurance that that set of business is in place. We had a very important vendor whose contract was coming up, a major impact on the business if it wasn't renewed at favorable economics. So once again over there. Those contracts tend to get put in place every 10 to 15 years. And then we were also going through a technology change in terms of the operating software that we were using in the business. And whilst there was no way that we could show completion on that, we wanted to show significant progress and enough maturity that the buyer could look at that and say, yeah, this looks reasonable.

20:32There's more time to be invested, some more money to be invested, but we can actually see our way through to an endpoint in terms of this transfer of technology. And the result was a sale at 15 times EBITDA. Now it's time for a slightly contrarian take, not just in terms of what we've been talking about in this episode, but on our whole season. Here's Michael Hollander, a partner with GTCR. Sometimes in the industry, I think there's too much fixation on trying to specify if I buy a business today, I'm going to exit it in three years, four years, five years, and starting to work towards that from the outset.

21:07What we say at GTCR though is when we buy a business, we buy it for an indefinite timeframe and we wanna treat it like we're gonna hold it forever. What we say is your reputation is something that you build over decades and can lose in seconds. And so our perspective around exits is you can't be overly prescriptive on we're gonna buy a business and then we're gonna sell a business a couple of years later. you have to buy the business and focus on changing the growth profile of the business, enhancing the business, and focus on that. And then start to think about the exits, but never stop investing in the business.

21:45Because again, if buyers don't have a runway, that gets into the market. And our perspective is you want to be viewed as somebody that folks can create value after they buy from you. His real point isn't that exits don't matter. It's the idea that when managers obsess over a set time frame, let's call it keeping one eye on the escape hatch, it can be detrimental to creating a kind of value buyers are actually looking for, especially in light of the current playing field. Or, as Michael explains, If you look at our industry as a whole, we unfortunately have done a pretty terrible job at returning capital to our limited partners.

22:23I think the stat is our industries return just a bit more than 10 % of NAV per year to LPs from 20 to 25. And when you think about most of us are in four to five year fundraising cycles, that 10 % implies capital coming back over a 10 year cycle. That's a pretty big mismatch. And I think part of that is people were very focused on a very prescribed path to exit over a couple of years, and then the market changed. And so folks couldn't get an exit. And, you know, at GTCR, we were fortunate most of our companies are, continue to grow nicely. And so without getting into specifics, we were able to generate, you know, return of capital much higher than that 10 % back to our LPs every year.

23:06And that's engendered tremendous goodwill with our LP base. And I think the reason that happened was because there was just a focus of, let's not focus on when we're going to exit, let's focus on building great businesses. And for great businesses, the exits will happen. To Michael's point, great businesses tend to attract attention and in some cases create an exit the manager never expected. Here's Matteo Stefano, the managing partner and co-founder at Apis Partners, a UK-based firm focused on financial services and infrastructure. We used to be invested in a money transfer business called Transfast, which we exited in 2018, if I remember correctly.

23:45And there was a similar company, a listed entity called Earthport, that had been the object of very deep interest by both Visa and MasterCard. And as we saw that Visa was possibly leading in that process, we went to MasterCard and we offered them our own version. and immediately you had a very, very straightforward transaction because you had a buyer that had already studied the market, had understood the competition, was already convinced of all the market dynamics and those elements. And so it was just a matter of diligencing in an extremely quick manner. I mean, it was a matter of weeks, honestly, the asset itself, but the decision had already been made.

24:27That only works if Transfast is more attractive than its peer. And there are other moments when the winds start blowing in the right direction. Here's Fahim from BC Partners. We have a challenger bank in our portfolio that we took public in the UK last year in the fall of 2025. And this was the largest IPO in London of a UK business in about four or five years. And the only reason we were able to hit what ended up being a very, very narrow window in the public market that allowed for the IPO was that the preparation the management team had done in partnership with our deal team over a relatively actually extended period of time allowed them to hit that very narrow window.

25:06On the other hand, there remains an argument that with so many exits coming from strategics, it's never too early to be building those exit routes. Here's Brian Cassidy, the president of Crestview. It starts day one, maybe not formally, but certainly with casual conversations. It often takes years to cultivate relationships with potential strategics. For example, we sold an automation business, JR Automation to a Japanese strategic, Hitachi, in 2019 for$1.425 billion. However, to prime the pump on the sale, our management team took many, many trips to Asia over the preceding years, meeting with potential strategic partners, advisors, etc.

25:51When it came time to run a process, they were very familiar with the business. you can't just simply you know send a sim to like a bunch of strategics and expect them to put in a bid in full reach it's just never going to happen and so you really need to prime it you really need to get the strategics comfortable with the management team you need them to see the results progressing in case anyone missed it no matter when you start cultivating potential buyers you need to deliver results in a sense there is a consensus the best time to start an exit process is when you've built a business that lives up to the story you want to tell about it, and you'd best make sure you can tell that story effectively.

26:30Exits are more challenging today, but they're not impossible. The margin for error is shrinking, yes, but buyers will show up for quality, and that's hard to develop if your only concern is when you're leaving. That's the balance. Build a company that you'd want to own forever, but keep your eyes out for the kind of owner that can take it to the next level and is willing to pay for the privilege of doing so. Next up, we're going to discuss the X factor that can make or break an exit, the humans involved. Thanks for listening. To make sure you get all the episodes from this season of Disruption Matters as they're published, subscribe to Private Equity Spotlight, wherever you get podcasts, or at privateequityinternational.com.

27:06This episode was produced by Natalie Novakova and edited by Eric Fish. Our music is Against the Clock by Rhythm Scott. I'm Rob Kotecki with PEI Group. See you next time.

27:20Hi Ho.