With high levels of liquidity in the debt, private and public equity markets driving strong valuations, you may be considering a full or partial shareholder exit. If so, running a dual track process is an approach you might consider as a tool to deliver higher valuations and deliver more transaction certainty.
So, what is a dual track process and how can it work for you? Well, as each transaction is different, the nature of a dual track process will vary every time you do it, but there are some general guidelines you can follow.
A dual track process involves running an initial public offering (IPO) at the same time as another liquidity process, such as a trade sale or private equity (PE) backed event. There are several ways of doing it.
A dual track process may involve just the preliminary stages of a process being run in parallel. For example, you may set up early-look discussions with IPO institutional investors at the same time as sounding discussions with PE or trade. This can help validate a choice of direction within a short four-week period. This approach allows an early assessment of the relative strength of demand from each option that subsequently enables a decision to follow a particular route of IPO, trade, or PE. In many instances, this approach is all that is required to reinforce the desired route that is favoured by shareholders or management.
Alternatively, a decision could be made to follow a full dual track process that takes three to six months. In this option, trade or PE are progressed to an agreed sales and purchase agreement, at which point the decision is taken to either close a trade or PE deal or to launch the formal IPO marketing process. This approach provides maximum optionality to shareholders and creates full competitive tension throughout the liquidity process.
Each dual track option can bring different outcomes for management and shareholders, but there are a few reasons why running a tandem process is a good exit option for shareholders: an effective dual track process can validate interest, achieve the highest valuation, and deliver greater deal certainty. Furthermore, shareholders can retain the flexibility to opt for either path until late in the process.
Running a dual track process also reduces the selling shareholders’ exposure to equity capital market conditions or a lack of interest from trade purchases or PE. It can also introduce competitive tension into the process. With significant liquidity in both equity capital markets and PE, and record levels of retained cash held by corporates looking to grow through trade acquisitions, a dual track process has become a highly relevant approach to delivering a successful liquidity event.
A dual track process is best applied where the objectives of the shareholders and management can be broadly met with more than one of the liquidity options. For example, for a management shareholder looking for a partial exit and wishing to continue to manage and grow the business, both an IPO and PE offer viable alternatives. For a financial investor looking purely for a liquidity event, IPO, trade, and PE all offer beneficial alternatives. The dual-track process provides a way to better understand the viable options under each scenario.
A dual track process is more complex than a single exit option. While all sales processes consume significant resources, a full dual track approach will significantly increase the financial and time burden on the business. A limited dual track process can, however, be conducted with marginal incremental cost and prove invaluable in validating the most suitable liquidity option. While the management of a trade sale or PE auction process is quite different from an IPO process, the core financial and legal due diligence work streams do materially overlap, creating some synergies across the different approaches.
Now that you know how a dual track process works, as well as the potential benefits and challenges, you have an alternative approach to consider when planning for a possible liquidity event.
For more information on how a dual track process can support your shareholder exit strategy, please contact Philip Secrett.