A private equity firm receives the lion’s share of its returns upon exit of an investment. (The remainder is realised along the way as dividends, distributions, management fees and capital returns.) The exit of an investment is typically in the form of one of the following:

1. Trade sale: this is the most common exit for private equity. The reason being that trade buyers in the same industry are often more likely to have synergies with the business. Therefore, they are the most natural buyers of the business and, ipso facto, trade buyers can pay the highest price.
2. Public listing: in the right market conditions, an IPO can lead to very fruitful outcomes for business owners. The major benefit of an IPO is that the business owners don’t need to subscribe to a raft of warranties and earn-out conditions, which are usually present in a trade sale. The downside is that the process is relatively costly and the results are acutely sensitive to market movements.
3. Recapitalisation: in some cases, the management team and other shareholders may decide they want to continue running the business after the private equity firm exits. Recapitalising the business (usually with debt) and using the new capital to buyout the private equity owner can achieve this.
4. Secondary sale: this involves selling the business to another financial investor (usually another private equity fund). Although this seems perverse, (you’d imagine if one private equity firm didn’t want the investment, others wouldn’t either), a deviation from a firm’s investment mandate can drive it (e.g. the business is getting too large for the fund to support).