Lesson 3 of 6 · 15 min
Private equity exits and risk-return
Private equity makes its money at the exit, by trade sale, IPO, direct listing, SPAC, secondary sale or recapitalisation, and its return comes with extra illiquidity and leverage risk that published indexes tend to understate.
In short
- Holdings last about five years on average (from months to more than a decade). A fund typically has a ~5-year investment period then a harvesting period; capital is called over time, not paid up front.
- Trade sale to a strategic buyer: synergy premium, fast, cheap, confidential; but management may resist, buyers are few and regulators may object.
- IPO: potentially the highest price, visibility, management support and continued upside; but costly, slow, heavy disclosure, market volatility and lockups. A direct listing skips the underwriters.
- SPAC merger: valuation fixed in advance, more time and forward guidance to build interest, flexible structure, seasoned sponsors; but dilution from warrants and fees, deal risk, regulatory uncertainty and overhang.
- Other routes: recapitalisation (not a true exit; boosts IRR), secondary sale to another financial buyer, write-off/liquidation. Exits can be partial or combined.
- Private equity is riskier than public equity (illiquidity, leverage) and should earn more; index returns are biased upward and volatility and correlations downward.
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