One of the concerns we hear about investing in private equity is the perception that it has become increasingly difficult to sell companies or take them public at the end of an investment period. For KKR, we have seen that planning for exits early, taking a creative and flexible approach to the exit plan, and making good companies great makes even the most difficult environments navigable.
In recent months, geopolitical tensions, regulatory changes, and market volatility have heightened concerns about exit prospects. However, as we have discussed in previous articles, aggregate views do not tell the whole story in the private equity industry given the wide dispersion of performance across managers. It’s important to look at each manager individually and the toolkit they employ to drive value in their portfolios.
Exits matter. Delayed exits create the potential for both muted returns and liquidity challenges for investors, as well as less dry powder for managers to deploy. We see that some experienced managers can continue to successfully exit companies through strategic sales, IPOs, and other types of sales during periods of market complexity. The key to navigating environments like these comes down to four things, in our view:
- Planning Early for Exits
- Embracing Multiple Ways to Win
- Taking a Creative Approach
- Driving Value Creation
We’ll explore each in more depth.
1. Planning Early for Exits
We start planning for the exit process from the moment we consider investing in a company. Why? To ensure that we have multiple ways to win, rather than relying on one type of exit, like IPOs, to monetize. In fact, across KKR’s private equity business, nearly 60% of our exits have been a sale, either to a strategic corporation or a sponsor.1 Typically, avoiding companies with binary outcomes—either they win big or lose big—and instead focusing on durable business models provides us with greater flexibility.
We speak often of our linear approach to deployment, in which we aim to invest approximately the same number of dollars in new deals each year to avoid being overexposed to underperforming vintages and underexposed to outperforming ones. We apply the same philosophy to exits. Rather than relying on market timing, we are consistent and disciplined in our approach. Often, when we have achieved approximately 80% of our operational improvement goal, we look to monetize.
As investors, our approach to building sustainable businesses naturally means we are not seeking to extract every ounce of operational improvement. Positioning our portfolio companies with attractive future opportunities for growth makes them more attractive at exit. As a result, our target hold period is five-to-seven years.
While selling a company where we still have some remaining improvements may cause some head-scratching, preparing to exit when most of the operational alpha is complete is prudent. It means we can entertain more exit options and wait for a better time if the moment simply isn’t right.
Early exits also tend to create strong demand for our assets, particularly when we sell to another company or private equity firm. On the one hand, we have significantly improved the company by the time we are ready to sell, but on the other hand, we have left some room for growth for the next owner.
2. Embracing Multiple Ways to Win
Discussions about the sluggish exit environment of the past few years often focus on the anemic IPO market. But exits come in three types: strategic sales to a company in the same industry, sponsor-to-sponsor sales, and IPOs. For managers with the right tools, experience, and preparation, when one door closes, another often opens.
Selecting investments that could pursue multiple exit routes and then building the value that makes them desirable to potential buyers during the holding period can help enable a successful exit down the road. Consider The Bountiful Company (Bountiful), a leading provider of vitamins and supplements in North America. We acquired the company in 2017 and quickly began work with KKR Capstone, our team of operational experts, to boost Bountiful’s research-and-development (R&D) engine, streamline manufacturing, and focus on the highest quality products. Notably, we drove more professionalization in the health supplements segment, a move we anticipated would make the company more attractive to strategic buyers down the road.
By 2021, just four years into our ownership, Bountiful achieved double-digit sales growth and higher profits. With most of our value creation plan executed, we began positioning the company for exit. Our KKR Capital Markets (KCM) team laid the groundwork for an IPO, building out the syndication and gearing up for a roadshow. As part of this process, KCM and the investment team held conversations with a few strategics, including Nestlé. The global food-and-beverage giant was intrigued enough that it executed full due diligence on Bountiful and submitted an offer to purchase before the IPO roadshow could even begin. Ultimately, we pivoted away from the public process and sold Bountiful to Nestlé in early 2021.
The reason we could choose between two good paths for exit is because we selected a business where we saw hidden value and then executed a plan to realize that value. This is a dynamic we see again and again in our private equity business.
3. Taking a Creative Approach
As the Bountiful example highlights, exit paths aren’t always straightforward. The same was true with our exit of Kokusai Electric (Kokusai), a Japan-based former subsidiary of Hitachi that makes semiconductor manufacturing equipment. When we took Kokusai public on the Tokyo Stock Exchange in 2023, it became the largest IPO in Japan since 2018 and the biggest private equity-backed IPO in Japan’s history.2
But an IPO wasn’t our first choice for Kokusai. When we initially began diligence to acquire the company, our planned exit was a strategic merger. When that didn’t pan out because of regulatory challenges, KCM and the deal team looked to the public markets. After receiving approval from the Tokyo Stock Exchange, we delayed the IPO due to the market volatility following the conflict between Russia and Ukraine, instead continuing to push forward our value creation agenda. The thesis of that agenda was to buy complexity and sell simplicity—when we acquired Kokusai, it was a complexly structured and run business; when we sold it, it was a pure-play semiconductor equipment provider. Our initiatives included boosting R&D, optimizing operations to meaningfully expand margins, increasing global headcount by over 30%, and implementing an employee ownership program.
By October of 2023, market consensus signaled that the semiconductor market had bottomed,3 but we still had strong conviction and saw upside in Kokusai. After all, long-term demand for Kokusai’s products was and still is growing due to innovations like 5G wireless and generative AI pushing up data processing volumes. We proceeded with the IPO, the results of which prove our value creation was robust enough to generate record-breaking returns.
4. Driving Value Creation
As we’ve already said, selling to strategic corporates can be a valuable option when IPO markets are either unavailable or unattractive. However, strategic buyers are industry experts and will only buy companies that they know are valuable additions to their own operations. This is where value creation becomes crucial.
A case in point for us was Minnesota Rubber and Plastics (MRP), an engineer of thermoplastic solutions for global medical, water, industrial, and other markets. In just over three-and-a-half years of ownership, we helped MRP achieve significant commercial improvements and higher profits even amid the challenges of the COVID-19 pandemic.
During COVID, we built a new global innovation center, enabling MRP to develop industry-leading research and development; executed two strategic bolt-on acquisitions; and implemented a broad-based employee ownership program. We believe our continued focus on investing in growth and expanding product capabilities, as well as a deep global network, enabled us to achieve an attractive exit. We sold MRP to Trelleborg AB, a European leader in engineered polymer solutions with strong strategic alignment, in August 2022.
Conclusion
Buyers of all types – whether they are corporate buyers making a strategic acquisition, IPO investors, or other sponsors – value predictability and the ability to plan for the future. While recent market volatility has heightened concerns regarding exits in private equity, these challenges are not distributed equally, and successful managers are those who lean into their repeatable, time-tested processes during periods of volatility. We can draw valuable lessons from previous periods of dislocation, including that maintaining discipline is the most effective strategy to navigate through turbulent times. When it comes to exits, starting early means that if markets are volatile, we have the space to wait for better terms for our investors. And when it’s time to exit, a creative approach that embraces multiple ways to win in exiting a company we have spent years growing and operating helps to ensure we get to the finish line, even if it’s not the way we first envisioned.
Perhaps most important, however, are the specifics of the investment. To exit in a variety of market environments, it helps to own companies many buyers also want to own. That starts with selecting the right companies and continues with making those companies more valuable through repeatable playbooks. An approach that balances flexibility and discipline, along with getting the fundamentals of operational improvement right, are in our view the key for private equity managers looking to keep returning capital to investors consistently, year after year.
