When is the right time to exit a venture capital or private equity backed business?

Venture capitalists generally invest through limited partnership funds raised from pension funds, insurance companies, banks, endowments and family offices. These funds have a fixed term – usually ten years – which is the period within which the limited partners look to realise their investments in the funds. Therefore, when it comes to investing the funds, private equity and venture capital investors have to be able to see a viable route to an exit and a return on their capital from each company they consider, or they won’t invest. 

When and how that value is realised depends on a number of factors, including the stage and sector of the business and how well it performs, and the prevailing economic climate. Generally, however, there are three conventional approaches to exit for a venture capitalist – IPO, secondary sale or trade sale.

Having been effectively closed for a number of years, the IPO market is now open for business again. Equity markets have improved with a number of high profile flotations expected on the London market in 2014. For the right companies, an IPO can be a way to achieve liquidity for shareholders, including private equity and venture capital investors, as well as providing access to capital in the future.

Secondary sales are also a potential route to exit for private equity and venture capital investors. Typically, this involves selling their stake in a company to another investor.

Private equity firms, in particular, often use this mechanism to realise their investments.
The most common and often preferred route for private equity and venture capital investors to exit is through a trade sale – selling the company or merging it with a larger entity in return for cash or shares in the acquirer.

Corporate M&A activity stalled during the economic downturn, but is now on the increase again. Many larger corporates have substantial reserves and are now looking to acquire smaller businesses in order to extend their product range or increase their customer base. 

A recent example is the acquisition of ControlCircle, which was backed by Scottish Equity Partners (SEP), by AIM-listed Alternative Networks for £39.4m. The SEP investment allowed for significant investment in systems together with strengthening of the management to enable the business to scale to the next level. This included bringing in a new CEO, Carmen Carey.  

From the outset SEP worked closely with management to leverage operational efficiency and promote the company’s strong market position in order to increase revenue growth. ControlCircle generated revenues of over £21m in 2013 from more than 100 large corporate clients and the company’s service quality and innovation has been recognised through various industry awards and accolades. Unsurprisingly, there were a number of potential acquirers for ControlCircle, including large US private equity funds. 

Calum Paterson is Managing Partner at SEP.

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