Funding exit strategies: what banks and PE firms look for

Exits are the lifeblood of private equity. Without them, firms can’t re-invest, and many companies can’t secure the capital they need to succeed and scale.

There are a variety of reasons why a private equity fund might look to exit an investment:

• They may feel the investment has reached its full potential under their stewardship, they’ve taken it as far as they can given their focus areas, or the investment’s realised enough value, so it’s now better to sell it to industry, public markets, or another PE firm.
• They might be under pressure from their LPs to realise investments and show some returns as there’s a fixed fund life period.

Or, in some cases, the investment may not have gone as well as expected, or has been impacted by an unforeseen event, so the time horizons they’d set for recouping their money no longer work, or it needs further investment and they’re not best-placed to make that further investment.

At OakNorth, we’ve been fortunate to be involved in several very positive and notable exits over the years, including to industry such as the LEON sale to EG Group in 2021 which I was personally involved in. Another example that comes to mind is our work with Heartwood Collection – we originally supported the business back in 2017 when it had backing from Core Capital, and once it was exited to Alchemy Partners in 2022, we continued supporting the business and its new sponsor. Another example was with The Inn Collection Group which we’ve supported with multiple sponsors over the years – Kings Park Capital LLP, Alchemy Partners , and now The Harris Family. More recently, we supported Warwick Capital Partners with the acquisition of Danforth Care Homes from LNT Care Developments, which we’ve supported for years.

As a lender, this ability to grow debt quantum as the business grows and new sponsors come in is invaluable. from the seller’s perspective, having a consistent debt partner can facilitate the sales process, and reassure management - we’ve been involved in several transactions where the management team has insisted on @oaknorth remaining the debt funding partner. This is where the relationship is key, and where our ability to write smaller cheque sizes in a market where many lenders only care about the bigger ticket deals, enables us to stand out.

Understanding sponsors’ strategy is also incredibly important – what is the sponsor trying to achieve? What are their time horizons? Are we able to extend facilities if the sponsor’s exit horizons get elongated? It’s essential to have these conversations upfront and ensure all parties can work collaboratively, especially as so many exits in the market are getting stuck (approximately $3trn of assets globally), due to higher interest rates, tougher leverage, a challenging macro-environment, and a valuation disconnect between buyers and sellers in the market.

Over time, we will see the market get unstuck – this has already started to happen – but in the meantime, we’re seeing sponsors exploring tools such as NAV facilities to unlock some value. While OakNorth is still fairly new to the fund finance market, we’ve managed to carve ourselves a niche, providing optionality for funds and PE firms seeking lower debt quantum from £3m up to £75m, but from a financier who can offer the full spectrum of products – capital call, GP lines, liquidity lines, and NAV facilities.

If you’re a fund or PE firm exploring future exit strategies, please do send me a message and I’ll see if we can help.

Mohith Sondhi - Senior Director at OakNorth Bank