The dual-track process has been around for some time designed to attain the best possible exit price for a private equity portfolio company. A triple-track offering is now being touted, which combines the traditional dual exit strategy approach of trade sale or secondary buyout with the alternative possibility of transition to IPO. Triple-track is being targeted at smaller private equity-backed companies, primarily in the lower mid-market.
Triple-track may stumble if there isn’t a willingness among firms in the lower mid-market to pay around three times the cost they would normally pay to exit a company. And then there’s the additional time involved in managing this. But equally, for vendors, a triple-track can provide a further way of extracting extra shareholder value from a deal.
Corporate finance boutique Clearwater Corporate Finance offers a triple-track process designed for smaller and mid-market businesses. The firm has developed a working relationship with City of London adviser Teather & Greenwood to run the triple-track process in parallel for clients.
Clearwater wanted to offer a formalised link-up with a broker renowned in the private equity community and so it is a slightly different model to the dual-track process many large buyout firms might employ, in that a formal tie-up with another experienced adviser is being offered. Clearwater partner Marc Gillespie says: “With Teathers we can run each strand of the process to the wire if necessary, but it remains flexible enough to discard any option at earlier stages in the process.”
He says he has seen too many businesses looking at selling or floating in a disjointed way and, at what is an extremely sensitive period for the business, this is just too high a risk to take. With triple-track, a firm can keep its options open until the finishing tape is in sight and avoid taking a chance on a last minute price chip, or perhaps even more damaging, a pulled float.
Jeff Keating of Teather & Greenwood says: “There is a lot of preparation involved in an IPO, you don’t know until quite late on in the process whether you are going to raise the money the company is looking for and at what valuation. The preparation can easily be done in tandem with a trade sale or secondary buyout.”
Gillespie adds: “Another element some private equity managers may want to explore and for which triple-track may prove useful is whether there may be an elusive strategic trade buyer in a more remote part of the world that might be interested but wouldn’t normally come up on the radar without using an adviser with good international connections.”
What a firm may be paying in fees for this service should at the end of the process be made up for in the sale price. Triple-track can create extra competitive tension when it comes to exit, pushing the price up and encouraging strategic buyers to pay a better price for the business.
Anne Rannaleet of Industri Kapital says: “The triple-track process is being offered to smaller businesses than Industri Kapital would normally look at. What they are calling triple-track is what larger players call dual-track. We don’t distinguish between a sale to a trade buyer and to a financial buyer in a secondary buyout transaction in the dual-track process. Where it makes sense we would always use such a process because we think it is our duty to investors to get the best price on the deal. We did explore both for Dyno and SSK. In both these cases the trade sale or financial sale got the best price. I do think this new process will be useful for those private equity firms targeting smaller deals.”
Simon Wildig of Close Brothers Private Equity, a firm for which triple-track might be an option, says: “We’ve not used it before, but that’s not to say we wouldn’t. It looks very similar to a dual-track, but is just differentiating between the secondary buyout and the trade sale. But this product seems to be firmly aimed at the VC-backed business and companies trying to get a bit more of a window on the public markets.”
Marc Gillespie at Clearwater has looked at what is on offer to larger businesses and then made such a service accessible to smaller and mid-market clients. “The sweet spot for Clearwater’s triple-track process is businesses worth £30m to £80m, but it can work well for businesses with a value of £15m.”
ISIS Equity Partners employed a triple-track process for its sale of UK clothes and footwear retailer Fat Face to Advent International in May for an undisclosed sum. Mark Advani of ISIS Equity Partners says: “If you’re deciding to exit a business you have to decide whether you want to explore all the options. IPO pricing completes very late in the process and the cost of a failed IPO can be substantial. If you want to explore an IPO then running a flotation process alongside a trade sale and secondary buyout process can give you the best of both worlds, it can also help to augment the sales price.”
He also stresses the cost isn’t that big in terms of fees and that the price ISIS generated for Fat Face was well worth the few thousand pounds paid in fees. He says: “The real cost would be if no deal came of it at all. The issue is getting the deal done at the best possible price. The cost has to be weighed against what you are getting out of the process.”
Simon Wildig concludes: “I’m not sure whether this method will be widely used, but it will inevitably be more expensive to go down that route. Ultimately the success of such an offering is going to hinge on the aspirations of the management team more than anything else. If they don’t want to be part of a public company, then that’s the end of that. From a VC’s point of view you have to decide if an IPO is what you want for the business and whether you want to end up still holding stock after the IPO. It can be beneficial, but it can work against you if the share price falls.”
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