When it comes to private equity, having an exit strategy is critical. The left chart shows the most common exit strategies: secondary buyouts, in which another sponsor purchases the target company; IPOs, in which the target company goes from private to public; and corporate acquisitions, in which another company purchases the target company. Recessionary and post-recessionary periods tend to be a suboptimal time to crystalize the most gains through an exit. However, as the cycle progresses, exits pick up, with corporate acquisitions being one of the most popular routes. However, the secondary market also ramps up later in the cycle, particularly as fewer opportunities are available. In 2020, overall exits have fallen, but the IPO market has picked up strongly in the second half of the year.

Another exit strategy that has had a resurgence in popularity is SPAC (special purpose acquisition company) IPOs, as shown on the chart on the right. Although IPOs and direct listings are typically more popular avenues, they are challenged during times of market distress and price declines. SPACs, often called “blank-check vehicles” IPO before they have a target, raise capital based on the expertise and reputation of the manager, and then acquire a target through a reverse merger with the money raised through the IPO. It is somewhat similar to raising money through a closed-end fund in the beginning.

SPACs offer private companies the ability to raise capital during their transition to public markets, helpful during distressed markets. However, SPAC IPOs ultimately tend to be nearly as costly as traditional IPOs, may only bring a company to market a few months faster, and have a track record of poor performance. Since 2015, non-SPAC IPOs have returned 37.2% on average while the 89 SPACs to complete a deal have returned -18.8% on average as of July 24, 2020. This is attributed to looser governance and less valuation orientation. However, now that market calm has been restored, the SPAC spotlight may begin to fade.