Given that the global economy has entered into a slowdown mode in recent times, we are witnessing a sentiment of uncertainty having permeated the Indian economy with distress signals emanating from across the trade and industry spectrum. With the economy navigating troubled waters, there is a decline in exits by private equity (PE) investors and investors are exploring alternate exit routes.
Such downturns are generally symptomatic of fundamental problems. The prevalent situation calls for greater investor vigilance, readiness and discretion. Right at the inception of entering into investment agreements, PE investors may formulate exit strategies factoring in negative scenarios. This may help in minimizing losses during economic slowdowns. Diverse exit strategies could be key to determining the preferred outcome from a particular business. This could vary from selling the business as a whole or accessing the public markets. With consolidations becoming more prevalent during economic downturns, factoring in leeway for sale to competitors in the investment documents could be a helpful measure.
A feasible exit option for founders could be acqui-hires or management buyouts where the talent pool is acquired by key players in the same or adjacent markets. This could be in consideration for a broader package deal comprising joining bonus, stock options or shares in the acquiring entity. However, in such transactions, the non-compete or non-solicit obligations will need to be carefully negotiated. It makes prudent sense to take note of the fact that the acquisition could be experimental for market entry strategies and could come with its set of inherent risks. In such situations, exit benefits for investors would need to be evaluated and negotiated with a potential acquirer.
During market downturns, distress buyouts and asset sales become prevalent exit options. The cost benefit analysis for the potential growth of a business, in case the economy resuscitates, will need to be evaluated commercially vis-à-vis the potential economic value of the assets on a short term and long-term basis.
A viable exit option from an investor’s perspective could be a secondary sale of its shares to a third-party investor, who is keen on investing in the same sector for consolidation or other purposes. A core challenge here would be to find the right match, especially when market sentiments are muted.
In order to maximise value and cope with the growing level of macro uncertainty, what needs to be considered is that down-turns sometimes create real opportunities resulting in lower valuations. The readiness to cope with, bounce back and pivot quickly when such a situation arises might be the key differentiator for the stakeholders involved.
