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28 Jun 2021 - Private Equity: Why Exit strategies are key to performance
By: Vantage Asset Management

Private Equity: Why Exit Strategies Are Key to Performance

Vantage Asset Management

25 June 2021

The value creation that Private Equity can bring to businesses, by contributing expertise across strategy, M & A and process enhancement is well documented and particularly applicable to private family or founder owned companies. This value creation comes when growth is accelerated through customer expansion, operational efficiencies are improved,  cost are reduced,  IT systems are implemented and additional talent is employed.  In an analysis of the US Private Equity mid-market, Adams Street Partners found that over 70% of value creation either came from revenue growth or multiple expansion largely as a result of business process enhancement, as opposed to value growth through financial engineering or debt leverage, which is often the perception of how value is created.

What is possibly more important but less well-documented is the value that is created through the "art of the exit": being able to determine the right time to sell and identifying the best method of selling a company to maximise investor returns. 

There is a common misconception that the primary source of equity release or exit from a private equity fund's portfolio comes from an Initial Public Offerings (IPO) and listing on a public share market, which was predominately the case in the late 1990's and early to mid 2000's where there were a number of high profile Private Equity IPO exits that generated significant returns for private equity investors.

However, there are at least three main methods of equity release that Private Equity fund managers consider when planning to exit a business, often years in advance of the actual exit outcome:


  1. IPO: by listing a company on a public exchange, a seller can often achieve an optimal pricing outcome by removing the discount that is typically applied to unlisted business valuations.  Further premiums can be achieved by listing when equity markets are more buoyant making timing an important decision.  As attractive as IPO's may seem, one drawback to an IPO as the primary source of an exit for Private Equity backed businesses is that IPO windows, that is those periods where public investor appetite exists to buy new listing opportunities, can rapidly close and we have seen this occur recently with a number of high profile IPO's being withdrawn due to a reduced level of support from brokers and their clients.  Another drawback can be that after listing, sellers need to retain equity in the listed company which introduces market risk that is not desirable for most private equity investors.
  2. Trade sale: Selling to a larger or listed company often in the same industry sector who may be looking to expand their existing operations to other geographic regions or to add to their existing product or service offerings.  These exits can attract premiums in situations where the purchaser is listed and trading at a higher earnings multiple thus gets an automatic uplift through multiple arbitrage.  Alternatively, there are private buyers who may be prepared to pay a premium for a business that provides a strategic platform to launch a new growth initiatives.
  3. Secondary Sale to a global private equity fund or institutional investor: These exits often occur where an acquirer is looking to either achieve a long term yield on the dividends from an acquired company or otherwise seek to expand the existing companies offerings to an expanded global market.


Private equity managers add significant value when it is time to sell / exit a portfolio company by allowing the company's executives to remain focussed on growing the business while the private equity managers utilise their expertise to pinpoint the right method and time to achieve the best price for the sale of the business.

In this article we will look at examples of some recent exits from the Vantage's Private Equity Growth Fund portfolios (VPEG2 & VPEG3) to illustrate how Vantage's private equity managers are able to generate significant returns for Vantage Fund investors:

1. IPO: Lynch Group

During April 2021, VPEG2 underlying fund Next Capital Fund III, completed the fully underwritten bookbuild for the IPO of portfolio company Lynch Group. Lynch Group successfully listed on the ASX on 6 April 2021, raising ~$206 million at $3.40 per share. The transaction followed a transformational investment period for the Company across the 5.4 years of ownership by Next Capital.

ynch Group has evolved from predominantly an Australian supermarket wholesale business with a fledgling growing asset in China, to the largest Asian vertically integrated grower and multi-channel wholesaler of cut flowers and potted plants across Australia and China. Next Capital sold ~50% of the fund's shareholding into the IPO. The remaining ~17.0% holding will be in escrow until release of Lynch's audited 1H FY22 financial results in March 2022. This IPO exit delivered Next Capital Fund III and its investors, including VPEG2's investors a strong multiple of invested capital.

2. Trade Sale: MessageMedia

During June 2021, Vantage's VPEG2 & VPEG3 underlying funds Mercury Capital Fund 2 (MCF2) and Fund 3 (MCF3) announced the sale of MessageMedia for USD$1.3 billion (AUD$1.7 billion) to Sinch, a leading global cloud communications business listed on the Nasdaq Sweden. This exit marks an excellent investment for Mercury Capital Fund 2 and Fund 3 and is representative of the strong partnership that Mercury formed with the founder Grant Rule and the management team.

Following MCF2's investment in MessageMedia in August 2018, the business transformed from a primarily Australia and NZ based SMS provider to the leading global Server Message Block (SMB) Customer Engagement platform. MCF3 subsequently made an additional investment in MessageMedia during November 2019, which further supported the business's transformation in rebuilding the management team, consolidating the platform and the successful add-on investment of US-based messaging platform SimpleTexting. Once completed, the sale will deliver MCF2 and 3 investors, including VPEG2 & VPEG3 investors with an exceptionally strong return on investment.


3. Secondary Sale to Institutional Investor: iseek

During June 2021, VPEG2 underlying fund Next Capital Fund III announced the sale of iseek, Australia's leading cloud, Data Centre and Connectivity provider to a UK based Information Technologies and Telecommunications Infrastructure Fund.

Following Next's acquisition of iseek in August 2018, management have heavily invested in the construction of two state of the art physical data centres in Brisbane and Townsville and captured material contract tenders from large state government agencies and tier one corporate clients. These initiatives, along with the industry tailwinds of organisations outsourcing data storage providers, positioned the business to have a strong long-term opportunity set, representing an attractive investment for the international acquirer. The sale of iseek will deliver another robust investment return to Next Capital Fund III investors, including VPEG2 investors.

All three of these transactions will result in excellent performance outcomes for our investors.  In fact, across the June 2021 quarter, five underlying company exits were either completed or announced from Vantage Fund portfolios. These exits will deliver Vantage's Funds an average gross 4.9 X return on invested capital, representing an average gross Internal Rate of Return of 73.9% per annum.



The market environment and economy generally remains very supportive of exits at the moment and a number of other companies across Vantage's portfolios are also positioning for exit across the second half of 2021. As managers across each of Vantage's Funds position each underlying company for sale, the number of exits from each Vantage Private Equity Growth Fund portfolio is expected to increase. These exits will ultimately provide Vantage Fund investors with an increase in returns and further distributions, providing a robust platform for each Vantage Fund to deliver their targeted returns to investors over the term of each fund.

Vantage Private Equity Growth 4 (VPEG4) remains open for investment to new investor until 30 September 2021.

Please click below to access further information about VPEG4

Funds operated by this manager:

Vantage Private Equity Growth

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