Five Dos, Two Don’ts At Exit Time

Exits are the most important proof statement in the private equity industry, and we love returning money to our investors and cashing in on years of hard work. Each exit is a treasure trove of lessons learned. So what makes for a great or not-so-great exit?

The best exits come when we achieve transformational growth—literally morphing a company into something dramatically bigger and better than it was when we found it. These transformations invariably lead to great things for everyone involved thanks to more jobs, bigger returns and companies poised for even more success. We strive for this type of success every time, but of course things don’t always go as planned.

We shared some of our (least) favorite experiences in last year’s “Lessons From the Loo,” so we thankfully won’t rehash those bad deals again. Let us instead highlight a couple of key mistakes we’ve made that kept us from maximizing value:

* Not selling soon enough. We almost always think we can make a company just a little bit better if we just hold it “one more year.” That may be true, but it has also proven costly when the window to sell has closed and a portfolio company continues to demand time, money and resources. It’s sometimes better to take 1.5x than hope for 2x and end up getting less than 1x.

* Working with the wrong people. This holds true throughout an investment period, but choosing the right management to set up a successful sale, and working with the right lenders, lawyers and other service providers makes a huge difference in a smooth exit and transition. The best and worst in people often comes out during the drama of an exit.

Fortunately over 24 years, we’ve enjoyed more than 60 wonderful, strong exits, and we attribute that success to a number of things, but they each boil down to effective transacting and operating. On the transacting side, our best exits have often involved:

* Entering growing industries at the right time. We bought satellite communications provider CapRock when that industry was on the precipice of explosive growth. This helped spur and facilitate strategic and tactical improvements at CapRock that ultimately led to a thriving company and one of our best exits.

* Finding innovators. Danish company Welltec made an obscure product with an arcane name—a “well tractor” that could maintain oil wells. The product worked better than competing options, helping us grow the company quickly through a key add-on acquisition in the oil sands of Canada while capturing market share all around the world.

* Finding the perfect strategic buyer. By sticking to our knitting and building great little companies, we often find strategic buyers who can build their existing organization quickly and effectively by buying one of our well-run portfolio companies.

Of course, excellent ownership, aka “operating,” is a critical part of any great exit. Some of the stories we’re most proud of involve building companies up by:

* Initiating new growth initiatives. Axiom, a transmission business in which we invested in 1998, struggled in a rough economy and through some management challenges. A new initiative to provide custom-built transmissions for the U.S. Postal Service’s vast fleet boosted sales and began a beautiful new relationship in this mature industry. Along with a heavy dose of hands-on operating activity, our efforts turned Axiom from a money-loser when we bought it into a compelling success story and solid return for investors.

* And completing add-on acquisitions. Sometimes as many as five add-ons have proven to be significant value drivers.

There are certainly more than 50 ways to leave your beloved company, but as we look at our best exits, they nearly all have one thing in common: They had great management teams at exit with incentives aligned with those of our investors. Companies like that are easy for any buyer to love.