Investment Exits / Liquidity Events

Transcription

1 Angel Business Club Investment Exits / Liquidity Events In corporate finance, a liquidity event is the merger, purchase or sale of a Corporation or an initial public offering. A liquidity event is a typical exit strategy of a company, since the liquidity event typically converts the ownership equity held by a company's founders and investors into cash. Investment Exits or in other words Liquidity Events can be achieved in different ways. Often these events are un-predictable as businesses evolve over time and Companies can have various strategies for Exit and we track each option as they progress. Initial Public Offerings - IPOs Initial Public Offerings IPOs New investment only Public Listings Dividends Share Repurchase Buy Outs

2 Initial Public Offerings - IPOs An IPO is the Clubs core strategy of creating liquidity events for Members. An IPO is when a Company lists on a stock exchange where importantly the Company listing raises investment from third party investors in turn this cements the valuation of the business. When a Company has interest from third party investors at IPO early stage investors such as the Angel Business Club often have the opportunity to sell down a % holding in these events we always recommend members to sell a % of their holding often enough to repay the original investment. Initial Public Offerings IPOs New investment only Some Companies on IPO can only attract new investment and are unable to offer early stage investors an exit. If early stage investors cannot divest on IPO it is important that the Company has a strong investor relation / public relation policy whereby interest from retail investors can be generated so that the Club can sell through market liquidity the choice of broker here is key to the aftermarket and may change depending on which exchange the Company lists. This prolongs our exit but provides the Club with the ability to divest over a period of time this strategy is for earlier stage businesses and members should expect the exit to last a period of up to 2 years depending on liquidity.

3 Public Listings Some Companies simply list on a stock exchange and do not raise any third party investment. There are a number of reasons why a company may choose to list only they are: 1. Its has an acquisition in mind and needs a tangible value to offer the target 2. It has a retail investor strategy whereby it intends to raise investment from retail shareholders through a marketing program 3. The Company does not need to raise capital but is providing shareholders with liquidity 4. The Company wants to attract a buyer and is effectively putting a price tag on the business 5. The Company intends to raise capital from institutions post Listing (many institutions cannot invest in private Companies) The liquidity in this scenario is very unpredictable depending on the above strategy it is common that liquidity in this scenario is slow and can take up to 3 years to exit.

4 Dividends A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of this reinvestment as a dividend to shareholders. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. This scenario only occurs when the Company is generating surplus profit and does not need to reinvest. Normally we would not expect to see Dividends from the businesses we engage with for at least a period of three years. However, there are always exceptions. The key to influence Dividend policy is to have a large enough shareholding (greater than 10%) and ideally a board position. A dividend is a reward to investors and therefore is not directly subject to any external market forces of volatility it is a Company decision.

5 Share Repurchase Share repurchase (or stock buyback) is the re-acquisition by a company of its own stock. It represents a more flexible way (relative to dividends) of returning money to shareholders. In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance. Like Dividends this scenario is more likely to occur from a mature business generating sufficient free cash flow/profit where the management want to buy back shares from investors. These transactions are also free from market volatility and are effected directly between the Company and its shareholders. Equally any profit is treated as a capital gain. Influence like Dividends is key. Buy Outs In finance, a buyout is an investment transaction by which the ownership equity of a company, or a majority share of the stock of the company is acquired. The acquirer thereby "buys out" the present equity holders of the target company. We typically like to choose companies that have unique or disruptive angles these kind of companies if successful attract interest from bigger companies in the same sector / market. At the Club we actively track potential trade sale opportunities for our members and companies. Buy Outs for shareholders often involve part cash, earn out agreements and part equity in the transactions where shareholders are not necessarily in control of their destiny however these types of transactions can often be extremely valuable to shareholders and can create long term value. Both private and public companies can be subject to buyouts.