Q&A: Triple-track exits

In addition to the traditional dual-track M&A sale or IPO exit routes, more GPs are considering a refinancing option, said Clifford Chance partner Michael Dakin in an interview with PE Manager.

How is this triple-track exit process different from what firms have been doing in the past?

Dakin: This is really an evolution from the dual-track system, where firms would try and keep the options for an IPO and an M&A sale open. I think in the past there was a tendency to be open to an option if it happened to come down the line rather than making fundamental strategic decisions at the outset. The added track, the refinancing option, was really a response to volatility and the fundamental challenges people are seeing in the market. At times we have seen deals where financing was no trouble at all and others where it evaporated in the course of a week as markets went down.

What are the benefits to a GP?

Dakin: The biggest benefit is just being able to keep your options open and to create competitive tension. Having options is absolutely key and the worst thing for a private equity firm is to be in a position where they have to pursue a particular route because they don’t have an alternative. I think there is also a big cost-consciousness driver here. Each of these transactions could be an expensive endeavour and to successively do two or three of them could be horrifically expensive. It’s essential that we focus on having the correct cross-practice teams available to take a strategic view and execute a given plan. A lot of firms have a considerable number of portfolio companies and they are going to come under increasing pressure to do something. The more choices you have the better your execution is going to be, so it’s really all about what can they do to maximise the value of their portfolio companies and achieve the best returns for the investors and themselves.  Also, having a credible alternative transaction creates competitive tension and may also improve overall execution.

How does it work?

Dakin: The goal is to ensure that any work that is done is translatable to any of the other tracks in the process. It’s all about sitting down, planning early, and taking a strategic view as to which option will take the lead and then designing a system whereby any work done on one process can be translated with the least amount of work to another process. For example the significant overlap between the due diligence for an IPO and a high yield notes issuance, either for a refinancing or an M&A sale, would be substantially similar once completed.