The Exit Playbook: Safe landings when exits stall

0:00I think the worst reaction is defensiveness or trying to force a process that the market's clearly rejecting. There are so many little things that can go wrong. You got to be prepared for that resiliency. You got to be told no a lot of times. You need to be really flexible with exits. Even in the good times, I think close to 50 % of sale processes fail. And I think you have to ask yourself to control the controllables. How do you turn lemons into lemonade? Welcome back to Disruption Matters, a podcast miniseries produced by Private Equity International in partnership with series sponsor Alex Partners.

0:38Every year, we delve into the forces that are reshaping our world and how private equity managers can best meet the moment. I'm Rob Kiteki, a deputy editor with PEI 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. This season, we're focused on exits, given how hard they are to come by these days.

1:10We wanted to offer a playbook of sorts, to show the tactics and strategies of industry leaders who are still getting them done. But a playbook isn't a map, because a map assumes the terrain doesn't change. If the last few years have taught us anything, it's that we're in a period of profound change and upheaval. So the best we can hope for is a playbook, which is no more than a set of principles and possible responses to what's happening out there on the field. And in this, our last episode of the season, we're here to address what happens when an exit process falters, and there's no choice but to go back to the drawing board.

1:41There are so many reasons that a process stalls, we could devote a whole season to them. But instead, we're here to offer the best ways to rebound from that setback. Along the way, you'll recognize themes from earlier episodes. The need to take the buyer's point of view, to plan with the new exit route in mind, to focus on the human capital issues in play. We don't need to belabor the point about timing. Something tells me that lesson was already learned. But let's begin with a reminder that as hard as people try to avoid them, stalled exits are part of the process. We'll start with Brian Cassidy, president of Crestview.

2:16I think every time you go through a sales process, you need to be eyes wide open because I think even in the good times, I think close to 50 % of sale processes fail. And so there are a lot of failed processes out there. And I think it's important to try to learn from that if there are lessons to be learned. Virtually every professional we spoke with echoed this idea of turning the setback into a moment to learn and vet every assumption that was made about a given investment. Here's Alexis Underwood from Windchurch, a middle market private equity firm based in Rosemont, Illinois. I like to treat it like a new investment decision, not like a failed event.

2:54I think the worst reaction is kind of defensiveness or trying to force a process that the market's clearly rejecting. And I think you do start with diagnosing it honestly. Why did it kind of not go through? Was it valuation expectations, market timing, growth durability, management gaps, credibility issue and diligence? Sometimes I think the most valuable thing a firm can do after a failed process is to step back and almost effectively re-underwrite that asset internally and say, if we bought this business today, what would our value creation plan be now? And I think that's a really valuable mindset shift because that feedback can be really useful operationally if it's appropriately incorporated.

3:39And late hold investments can still create enormous value. Things like an ERP implementation that you didn't want to do, but maybe this gives you the time to do it. Or pricing infrastructure, rev ops capability, management upgrades. I think that those kind of investments can dramatically improve your buyer confidence, the quality of earnings, that future scalability, and sometimes the whole buyer universe itself. And that second underwriting can't skimp on looking at everything that contributed to that stalled process. Here's Adrian Letts, managing partner and head of business operations at Brookfield Private Equity.

4:17So look, I think first and foremost, it's important to understand why it broke down. You know, sometimes processes break down because the world has changed. You know, whether that be disruption to the oil process we're seeing right now, which changes the economic landscape, which changes people's perception of, you know, where we are in the world. and then there are things that have happened to the business or around the business that might disrupt the process and then equally you know there are other things that can derail it you know financing hasn't come through in the way that we thought it was going to or you know whatever the case might be.

4:55It's a sentiment echoed by Saurabh Singh a private equity partner with Alex Partners. When you do a quick root cause analysis as to why it happened and there are a bunch of controllable factors and then there are several uncontrollable factors. You try to pivot for whatever is controllable. But one thing which becomes very important is communication. The CEO and the CFO are there. So they are very much a part of it and they know everything. But there are a lot of other people who are actually just waiting for good news to happen. So just communicating it with the team, not just the leadership, but maybe the L2 and the L3.

5:28And then whatever pivot that you make, bringing them along the journey is very important because even if it's going to be a two-year journey post that, it's very important that you all are rallying behind that same mission. So I would say communication is key. And then repivoting based on whatever factor was identified is important. But several people we spoke with cautioned about giving too much weight to those uncontrollable factors. Here's Neil Kalvelidge, Senior Managing Director and Head of Portfolio Operations at Centerbridge. The easy answer is macro, right? Oh, you know, the macro moved against us.

6:04I think that's too easy of an answer, right? I think you have to do the deep dive, and I think you have to ask yourself to control the controllables. Even if it is macro, what would make your company stand out? How do you gain share? We went through one of these processes as well, probably more than one, but one that comes to mind with a financial services company. And actually, the company had strong results and a clear strategy. And they even had some interested buyers who showed up. But none of them were truly excited. Like none of them were leaning in, pounding the table, and sort of clearing that reservation price at a high enough level.

6:42And so we did two things. You know, we hired an independent consultant who was a retired equity analyst from inside the industry. They knew all the people in the industry. They knew all the buyers. They knew what all of the strategics were being valued on and what was driving their decisions. And so we did a retrospective buyer by buyer as to what would it take to be a good fit with this buyer? Why weren't we a good fit with this buyer? At the same time, we also brought in some strategy consulting and just took a look at the strategy for the businesses and how are we going to reset the strategy?

7:14One of the things that came out was customer concentration was too high. So we're going to have to work on that. One of the things is we had a great product set, but that product didn't fit neatly into a box that any of the buyers really wanted to complete their set. And so it's like, okay, how can we either innovate and modify our product set or reposition it in a way that actually does check that box? So many folks stress the need for outside voices. Here's Lane McDonald, Managing Director of Operations and Strategy at Omer's Private Equity. We ran through a process, didn't end up getting a compelling offer at the end.

7:53So the process we went through, which we've now codified and it becomes, you know, hopefully we don't do this very often, but has become the process is, you know, we used it as an opportunity for really deep learning. So we sat down with the sell side, you know, CDD. Here, CDD refers to commercial due diligence. We sat down with all the BuySide CDD folks that we ran into across the process, spent a ton of time with the investment bankers who ran the process, got the unfiltered story about what they were really feeling. Obviously, our industry is small, so we also spoke with friends who were on the potential buyer list and really deeply learned about why they couldn't get to the finish line.

8:37What was it that made you? When did you decide to walk away? What was it? So in this particular situation I'm describing, we came up with kind of eight things that here's what happened. Here's why that failed. But what to do with that information? Plenty of folks suggest getting out of the office to regroup. Here's Doran Grossman, a former operating partner and CEO. I think the most critical thing is to get all the constituents involved in that particular transaction off site for two or three days, clear their heads, re-establish connectivity and focus. So the investment bank has got to be there, the equity sponsor, board members and others have got to be there, members of the management team, maybe select other constituents.

9:20And you really have to take a hard look at what caused the failure and what elements of that failure could potentially carry through to the next process that you're going to run and which elements may not carry through and where the success points were. And Then you have to re-gear. So you can't have a broken deal process end and immediately have the next deal process start. You need a period of time where there is assessment of the failure and what needs to get done. And then some time needs to be allowed for some seeds to be planted and some successes to be garnished before you go back to market through whatever mechanism I think you may think of.

10:01So I tend to think about that in terms of strategy, the execution and the management team that really need to be looked at in an in-depth way. Here's how Lane tackled their offsite regroup. Got the entire management, you know, stuck in a room for two days with, you know, a marker and whiteboard, which is my, you know, my happy place, my favorite thing, and started a start, stop, continue exercise. Guys, here's what we heard. Here's what the market said about us. Whatever it is we're doing, we kind of have alluded to in the conversation, so we can be chugging along happy as we please, but we are not getting what we're good at and what we're doing as a clear message out into the market.

10:42here's what they said. And one by one, you know, I had that sticky chart on my office wall for three years. And one by one, we attacked with strategic, you know, discipline every single one of those pieces of feedback via our start, stop, continue exercises, which included, you know, selling off two divisions and stopping some products that didn't feed into, you know, this here refers to a confidential information memorandum. But as fun as these retreats can be, no one should shy away from tough questions. And that offer requires the presence of people beyond the deal team and senior management.

11:25Here's Alex Greenbaum, the partner and head of core infrastructure at EQT, about getting to the real causes of this setback. Well, let's be honest, it can be hard to do that, right? I mean, that may mean that you have the wrong management team. So who's going to admit that they're the wrong management team? It may be that the sponsor had a really unrealistic view of value or of strategy. They got the strategy wrong and they were driving the business in the wrong direction. So it's really hard for people to do that inward look. And I actually think independent board members serve a really important purpose or can serve a really important purpose here, being a little bit more disconnected in some ways than the management team or the sponsor themselves.

12:02I think engaged independent board members can sometimes provide that perspective of, hey, look, take a step back, really reassess the problem and consider how to pivot it. However, like anything else, it's a matter of balance. Simply getting a company ready for an exit is its own triathlon, so senior management may need a moment to catch their breath. Here's Helen Lee Buyeg, an operating partner with Ardian. I do think that you need to be respectful to the management team and actually let them take a pause first. I know maybe in the US, a long weekend is already like a vacation in Europe. I think we have a different perspective.

12:43But the clear thing is, it's human. We would expect our CEOs and CFOs who have really given the all-nighters and all that investment to take a pause and take a break and then regroup and say, okay, first do a diagnostic analysis of what actually went wrong or not, because it could be totally macroeconomic or deal dynamics that had nothing to do with the portfolio company or its performance. Because most likely, if you have a faltered deal, the probability that you're going to go back to the market in nine months is pretty low, especially in today's environment. You're probably back in the scene for at least a two to three year timetable minimum.

13:27And so in that timeframe, what are you trying to achieve? You need to regroup and you need to reset and re-examine what you want to achieve as a team. We're already calling this a playbook. So let's lean into the sports metaphors here and argue that this is the time for inspiring the players to get back on the field. Here's Chris Satchel, head of portfolio tech at CDNR. You know, I might be dealing with a CTO, a CIO, a CISO, a combination that has just put a lot of emotional energy into a difficult process with the expectation that it's going to be a great event. And now we're saying, you know what?

14:02We're not going to do that. We think it's going to be, I'm going to pick a random numbers. We're going to try again in 18 months. We think the market will be more supportive, et cetera. We need to do some things. So helping them emotionally sort of get back on track with, okay, it's going to be even better. Let's focus on these things. Let's go and really try and make this even better. And that's going to be a great outcome. and look at what happened during this process. Look at how much more you've understood your story. Look at the good things that happened. But we have to realize we're dealing with people that have put a lot, like on top of difficult day jobs, have spent so much energy into a process and so much emotional energy.

14:41Like you have to actually find time and have a plan for how do you recover that and get them excited again to go run that trail again. And if it's been really hard, you're thought of like, I'm now going to run hard for another 18 months at the end of it is this thing again. that was just killing me for the last like three months. So there's no easy answers there. And I think this is where having really experienced staff on the operating side in the deal. So it really helps to give that management team energy again. We'd be remiss if we didn't acknowledge that regulatory bodies do play a role in complicating exits, especially in certain industries.

15:15Here's Chris Tabor, a private equity partner and managing director with Alex Partners. If the FDA shows up and does an inspection of one of the plants of your portfolio company that is a pharma company and finds things and ends up issuing an opinion that is not favorable, and you're in a 4 -in-3 or a warning letter situation where the FDA has said, things don't look good at this plant, the right thing to do there is probably to pause. It's not to accelerate your process because your credibility, if you try to accelerate that exit, is going to be hampered. So take a pause on that process, fix the thing that went wrong, and then come back 12, 18, 24 months later.

15:57Not all setbacks are created equal, and some might not even be worth canceling the exit process. Here's Alex from EQT again. Oh, there are so many little things that can go wrong. I mean, one of the obvious ones is somebody leaves. One of the senior team leaves, and it's unlikely when you're so close to an exit, of course, in private equity, but it does happen for various reasons. Someone gets an amazing opportunity or a family situation. That obviously is highly disruptive. Another one is sometimes when people know you're exiting, they try to use it. That leaks into the market. Sometimes counterparties, customers try to use it against you.

16:33So you're in a negotiation about a contract. They know you're in a sales process, and they go, I know you can't afford to lose my contract right now. So definitely sometimes counterparties, regulators, various people like that will try to use it as leverage. And so you got to be really well prepared for that. And then, of course, like, you know, there's just some headline stuff that happens, you know, these war in Iran and change in interest rates. And these are things that are out of your control. There's not much you can do. And so you do have to make a decision kind of in live real terms. Is this such a big change that I should pull the process before it gets tainted or there's a negative perception?

17:07or is this sort of a flash in the pan and we should continue and go through to the end? So that's a tough call to make and it's obviously very facts and circumstances driven. And sometimes those factors can be minimized by simply communicating with the buyer. Here's Fahim Ahmed, a partner and COO of BC Partners. There are sometimes situations where perhaps the buyer has misunderstood certain signals that have come during the process and are going in one direction where everybody has the incentive and intention to get a deal done. But as we all know, getting to that deal point is always a bit difficult.

17:43And reading signals the wrong way can sometimes be an issue. And so sometimes it's as simple as ensuring direct communication. Often, obviously, we're as buyers and sellers talking to intermediaries, but every now and then having a direct conversation can really help get that type of issue back on track so that you have a real meeting of minds. Adrian from Brookfield also sees the value in keeping those channels open. I think oftentimes process breaks down because there isn't great communication and people are second-guessing each other and making assumptions about things that may not necessarily be the reality.

18:21I, as a buyer, might have read a headline around something of how it's going to affect the industry. And I take that as fact in terms of how it's affecting the company that I'm buying rather than, Adrian, I read this headline. I'm seeing this commentary in the newspaper. How do you think that affects the business that you're selling to us? What do you think the implications are? And how should I think about that in terms of the outlook of the business plan that you gave me and the strategic rationale that we've laid out? And that's a discussion. And that is about trying to be rational and factual around things that are happening or have happened.

19:02and you'd hope that you can square the circle on those and you'd hope that the process can get back on track. But there are some times when the process, it needs a bit of time. And I don't think having a conversation with a buyer or a buyer having a conversation with a seller saying, we really like this asset, but can we just see how things play out over the course of the next month or two is necessarily bad provided everybody continues to talk. Let's say that the buyer still walks away. It's important for managers to stay flexible, not just in terms of continuing to improve the portfolio company, but also with what an exit even looks like.

19:42Here's Crestview's Brian Cassidy with an example of redefining success. So we recently had a situation stall on the 10-yard line, maybe it was a 5-yard line, when missiles started flying in the Middle East. It was a great business, it was experiencing tremendous growth. So we quickly regrouped. We pivoted to other options, including a partial sale, a minority investment, a strategic partnership, or we are going to decide to do nothing. Given the expected growth and earnings, which we talked about before, in this market, the buyer's always going to pay you more for actual results than expected results.

20:22And this business had zero leverage. And so it just requires regrouping, resetting expectations. I think it's just a lesson. You need to be really flexible with exits. It could be a partial sale. It could be a strategic investment. You're not going to always sell 100 % of the business in this market. It doesn't just take flexibility, but resilience as well. Here's Michael Hollander, a partner with GTCR. We have a fund administration business called Altimus. That's one of the larger private and registered company, registered vehicle fund administrators in North America. And we first invested in the business in 2019, pulled two businesses together, Ultimis and Gemini, and then added a couple other deals over the next couple of years.

21:09Achieved pretty strong growth and started to get some inbound interest in early 22. Decided to go out to market. And mid-22 was a terrible time in the capital markets. You had interest rates that just shot up. Twitter or X was hung with the big banks. And so in the middle of 22, we got bids, but frankly, we didn't have confidence in the capital markets that the buyers would be able to get the debt that they needed to facilitate the transaction. And then from the first round, we saw some questions. Folks asked questions around how our registered vehicle, which is ETFs and mutual funds, fit with the private fund administration.

21:49And so we decided to pull the process and quickly went back to the management team and to the point around the diagnosis said, hey, part of this was outside of our control. We don't control the capital markets. But on the point around the questions around how did the two sides of the business fit together, we said we need to make sure that we have a plan for how we can better defend what that opportunity is. And they got to work doing just that. And the team did a very good job building out capabilities around retail alternatives, where folks were using registered vehicles to invest into what had traditionally been alternative asset classes.

22:26And they developed those capabilities around interval funds and things of that nature. And then we were helped by the market where retail alternatives took off very quickly. And so then a few years later, in early 25, we were able to take the business back to market. And what had been a question became a strength, just because they had very strong retail alternative capabilities that were growing rapidly. and as we went to market, we were able to talk about that with potential buyers and buyers quickly keyed in on that given the strength in the retail term space at the time. And so you often have to think about how do you turn lemons into lemonade if you hear tough things around the process?

23:07And that was a specific situation and the management team did a very nice job building out capabilities that then led to an exit at a materially higher value than it would have been a few years ago. That's a great comeback story. but there's no hiding how much work was involved. Exits aren't getting any easier, but here's Alex with EQT with some much needed perspective on the whole process. You know, in addition to my time on private equity and infrastructure, I was a banker for 10 years and saw this through the buy side and the sell side. And one of the facts that I think shock people who are maybe first time selling a company or management teams is typical sales process sends about a hundred NDAs and teasers out and winds up with about one and a half final bids and that's in a good environment.

23:51So you're going to say 99 people or 98 and a half percent of the people you contact are going to say no. They're going to say no at different stages for different reasons, but that can be a very like demoralizing process to go through. Groups that show a lot of interest will then wane for reasons that are not obvious. And so my biggest advice to either management teams, board members, or investors who are going through this for the first or second time, and maybe haven't seen as many of these, is you got to be prepared for that resiliency that we've talked about. You got to be told no a lot of times, but it only takes one.

24:24And that's, I think, the other important lesson of this. So my best advice is actually focus on those one or two and don't try to keep 10 options open. You kind of know who your best buyers are pretty early in these things. And I would say, yes, more options are good, but court the people who really love the business. And that is probably your best advice to get to a successful outcome. It also should be noted that our panelists agree no one should be sending out 100 teasers these days. Now, we'll let Ricardo Basile, an operating partner and head of value creation for Primera, have the final word.

24:55It's about finding a way of eventually exiting the business. And I can think of a number of failed exits that have happened over the past 11 years that I've been at Primera, but none of them has then stopped us from selling the business two years, three years later. So you find, you learn, you move on, and eventually you find a great home for the company on a full basis. And that ends our fifth season of Disruption Matters. This year, we've learned some core principles in earning exits these days. The buyer's point of view has to stay front and center. Exit routes need to be built from the beginning of the transaction, but constantly updated.

25:33The timing of any exit needs to be married to results that back up the story being told to buyers. Managing people remains a vital part of the process. And when an exit falters, it's time to diagnose what happened and try, try, try again. Thanks for listening. To hear all the episodes from this season of Disruption Matters, subscribe to Private Equity Spotlight wherever you get podcasts or at privateequityinternational.com. This episode was produced by Navalny Novakova and edited by Eric Fish. Our music is Against the Clock by Rhythm Scott. I'm Rob Kiteki with PEI Group, and we hope to see you here next year.

26:08Thank you.