When investing in a business at an early stage, many people have concerns over the liquidity of their investment. This guide provides an overview of some of the options available to investors to ‘cash out’ when the time is right.
Initial Public Offering
An Initial Public Offering (IPO) is the process by which a private company transforms into a public company. The company offers, for the first time, shares of its equity to the investing public. These shares subsequently trade on a public share market.
In New Zealand there is the main NZX board, targeting large, established companies with market capitalisations in excess of $100m, and we have the smaller NXT board that deals with businesses in the $10m to $100m range. An IPO is an exit option for a firm that has previously sold equity through a crowdfunding platform and has subsequently gone through a period of growth. It may not suit all firms due to the market capitalisation requirements.
There has been talk from the NZX and other interested parties of starting an additional exchange specifically for the trading of shares in equity crowdfunded firms[1]. It is not clear yet how such an exchange would operate. Either the firm would transition to a listing on the exchange having previously been through a round of equity crowdfunding or, the equity crowdfunding round would act as a listing in itself with shares immediately being tradable – much like an IPO.
Mergers and Acquisitions
These liquidity events refer to the consolidation of companies where one company buys or combines with another to expand their business, eliminate competitors and gain synergistic advantages. It can often be more cost effective and efficient to acquire or merge with another company rather than expand organically.
Usually, when a larger company buys or merges with another company, existing shareholders are ‘bought out’ at a premium. This is the business model private equity firms employ whereby they seek undervalued, private firms hoping to profit from a sale at a later date. This is an exit option for shareholders in equity crowdfunded firms that are not yet large enough to list on a stock exchange.
Management buyouts are a variant on an M&A transaction that occur when the management of a firm buys out the owners. Although less likely to occur in the realm of equity crowdfunding, management buyouts are a viable exit opportunity for investors not involved with the management of the business.
Private Sale of Shares
Equitise has partnerships with Computershare that enable us to offer an exit option that is not contingent on management deciding to undertake in large transactions such as the ones listed above. Computershare acts as an intermediary, matching shareholders with potential buyers. As this is a private transaction and is not of the scale of an IPO or M&A, the process is far more streamlined. Stay tuned for a more a detailed post on the process of a private sale through our partnership deal with Computershare.
[1] http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11447852