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IPOs and ESOPs as exit strategies: Prepare for the complexities

After several years of very active deal-making in the private equity industry, fund managers may find they need to begin considering some alternative strategies for exiting their portfolio companies. If plans call for a nontraditional strategy, such as taking a company public via an initial public offering (IPO) or selling it to an employee stock ownership plan (ESOP), early preparation is essential. 

When private equity fund managers approach the end of a deal cycle and start considering how best to capitalize on their investment, they often discover that a traditional third-party sale to a strategic acquirer or a secondary buyout by another investment group might not be the most lucrative exit strategy. Alternative strategies could potentially produce a more favorable return.

For example, taking the company public through an IPO could provide a more accurate true market value for the portfolio company. On the other hand, selling to an ESOP could produce a more favorable return as a result of potential tax treatment for ESOP companies and their investors. 

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