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Invest in InsightPrivate Equity Market Brief on Exits

ContentsExecutive summary 02

Macro market trends 03

Key points of evolution 09

Looking forward 13

PE and their buyers see opportunities for efficiencies 14

Exit Preparation 15

Deal Marketing 17

Sell-Side Due Diligence 18

Recommendations: Three ways to digitize the PE exit process 19

0101

Executive summary

Although global private equity (PE) dealmaking is down from pre-COVID-19 pandemic levels and dealmakers remain uncertain on turnaround timing, they are still active in pursuing ways to deliver investor returns by opportunistically exiting.Traditional exit avenues such as initial public offerings (IPOs) and selling to corporations remain most popular, but PE fund managers are also looking for ways to capitalize on a red-hot equities market. Debt financing, private investment in public equity deals (PIPEs), and special purpose acquisition companies (SPACs) are some prominent options. PE fund managers are also searching for exiting investments in sectors that have been less affected by the pandemic, such as healthcare and IT. Many hope to offload their previous investments in subsectors such as home fitness, media, and consumer goods that have benefited from the pandemic and that look promising relative to the broader economy.

Private equity perspectives: The evolving pathway to liquidity

To understand how PE sell-side teams are preparing for the exit process and adapting to technology’s increasing role in deal preparation, marketing, and buyer due diligence, Datasite surveyed over 500 global PE professionals to get their perspectives. The results show that PE professionals want to emerge from the COVID-19-era prepared to market and close deals as soon as valuations start to accelerate. Yet, they also want to be ready for buyers that want to acquire before valuations peak.

PE sell-side teams will move faster and drive higher internal rates of return when preparation, marketing, and sell-side due diligence are fully integrated.

Fundraise Source + Acquire

Restructure Manage Portfolio

Prepare for Exit

Deal Marketing

Sell-Side Due Diligence/Exit

02

Macro market trends

Global PE exit activityCOVID-19 transformed financial markets in 2020, including PE. While PE dealmaking exemplified the impact of heightened investor caution, it remained surprisingly resilient. Liquidity stayed relatively flat, although PE firms had to consider more nuances in the broader exit market.

Prior to any pandemic-induced slowdown in PE-backed sales, exit volume had already begun to slide in 2019. Historically, global 2019 exit tallies were still robust, but these figures represented the first downtick after a five-year stretch of record PE firm liquidity. Figures for 2020 remained healthy compared to the years prior to 2015 but represented another year-over-year decline.

2006 2007 2008 2009 2010 2011 2012 2013

Global PE exit activityAs of 12/31/2020, Source: PitchBook

Exit value ($b) Exit count

$454 $767 $337 $219 $484 $639 $534 $647 $1,090 $904 $881 $1,037 $999 $800 $7442014 2015 2016 2017 2018 2019 2020

1,742

2,242

1,568

1,143

1,908

2,3132,476

3,2753,125 3,083

2,561

1,777

2,969

2,209

3,215

03

Fewer chances at desirable exits could lead to some diminishing returns for PE fund managers. For example, even if multiple restaurant chains were hit the hardest by the pandemic’s effects, not all PE funds concentrated in the restaurant sector saw immediate potential impact to their future performance. PitchBook’s preliminary latest fund performance figures for Q2 2020 illustrate that a broad recovery has already occurred, helping even out performance for the year overall. Such results were buoyed by the relatively healthy exit value of over $340 billion in H1 2020. The latest PitchBook Global Fund Performance Report notes that on an anecdotal basis, the financial services and industrials sectors outperformed the broader PE ecosystem.

Strong exit sizes further reinforce a relatively brighter picture for PE sellers—even amid the chaos of 2020. Overall, the global median PE exit size held firm at $210.3 million. The average soared on the back of record IPO debuts in a uniquely strong equities rally. However, secondary buyouts increased only somewhat to $292.5 million, and the median size of mergers and acquisitions (M&A) dipped from $133.5 million in 2019 to $126.2 million in 2020.

2006 20062007 20072008 20082009 20092010 20102011 20112012 20122013 20132014 20142015 20152016 20162017 20172018 20182019 20192020 2020

Global PE median exit size ($M)As of 12/31/2020, Source: PitchBook

Median Average

$0m $0m

$1b

$408.3

$592.3

$369.4

$412.5

$445.5

$598.7

$406.2$494.4

$720.7

$527.6$604.8

$628.9

$670.5

$1053.6

$515.7

$210.3$196.8$133.2 $137.9 $99.1

$79.6$140.0 $131.6 $140.0 $160.0 $166.6 $198.4

$134.6 $188.8 $150.0

Global median PE exit size by type ($M)As of 12/31/2020, Source: PitchBook

IPO Buyout Acquisition

$600m

$90.0 $85.0

$200.0

$288.5

$234.7

$164.0

$87.1

$70.2

$476.0

$48.9

$90.0 $107.3 $115.9

$152.6

$401.7

$461.0

$142.5$126.0 $118.8 $111.5

$150.9

$249.5

$349.7

$503.1

$272.0

$133.5 $126.2

$292.5

$238.4

$287.2

$171.8

$289.5

$200.0

$356.1

$96.1

$143.8

$588.0

$133.6

$521.1

$159.2

$424.0

$143.6

$148.4

$697.9

$250.0

04

Buyer appetite for attractive assets and companies, regardless of the pandemic, likely helped exit sizes remain healthy. In addition, financial conditions were primed to keep making deals. Borrowing remains cheap, publicly traded companies have benefited from the bullish recovery in equities, and PE firms have a hoard of dry powder. PE sellers can still take advantage of such conditions, but they may need to be more opportunistic in 2021. Breaking down exit volume by type clarifies why: 2019 notched a record

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global PE exit activity (#) by typeAs of 12/31/2020, Source: PitchBook

Global PE exit activity ($) by typeAs of 12/31/2020, Source: PitchBook

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

proportion of sponsor-to-sponsor sales—a traditional and viable exit route, yet one that necessitates careful diligence to prove the value in transferring ownership to larger and/or more sector-focused funds. 2020 saw nearly as large a proportion of secondary buyouts, a slight resurgence in the proportionate volume of PE-backed IPOs, and a huge increase in associated aggregate exit values to the tune of $253.1 billion.

100%

0% 0%

IPO IPOBuyout BuyoutAcquisition Acquisition

100%

05

PE fund managers remain opportunistic, and traditional M&A is still popular as an exit route. But as the PE universe has grown, secondary buyouts have become more viable. Capitalizing on the remarkable 2020 equities market only further made sense as a strategy for PE firms. The appetite for digitization also enabled opportunistic sales of IT portfolio companies, which accounted for the largest proportion of exit volume ever in 2020.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global PE exit activity (#) by sectorAs of 12/31/2020, Source: PitchBook

2006

100%

100%

0%

0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global PE exit activity ($) by sectorAs of 12/31/2020, Source: PitchBook

Business Products & Services (B2B)

Business Products & Services (B2B)

Consumer Products & Services (B2C)

Consumer Products & Services (B2C)

Energy

Energy

Financial Services

Financial Services

Healthcare

Healthcare

Information Technology

Information Technology

Materials & Resources

Materials & Resources

06

However, such opportunism requires investors to move swiftly and navigate complex scenarios, such as cross-border acquisitions and regional rollups. Interestingly, year-over-year exit volumes resulted in Asia and the Middle East registering some of the smaller proportional declines in 2020.

2006

100%

0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global PE exit activity ($) by regionAs of 12/31/2020, Source: PitchBook

North America Europe Asia Africa

Middle East Oceania Rest of the World

2006

100%

0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global PE exit activity (#) by regionAs of 12/31/2020, Source: PitchBook

North America Europe Asia Africa

Middle East Oceania Rest of the World

Although its volume is still quite small, cross-border M&A—both financial and strategic—may prove more buoyant than expected given shifting geopolitical tides and increased government incentives to bolster economies.

07

Key points of evolution

Maturation2020’s opportunism reflects innovations in liquidity approaches and the gradual evolution of PE ownership models from earlier years. Throughout the 2010s, the time taken for companies to exit (excluding secondary buyouts) from their first investment round rose from a median of 3.8 years in 2009 to over seven years in 2019. That same year saw the highest average yet, at just shy of 8.6 years. PE companies taking longer to grow businesses prior to exiting contributed to this trend, but the average time to exit has still steadily risen, even while the median has stayed constant over the past few years. It seems that PE firms have improved the consistency with which they create value and then liquidate their stake in companies.

Global PE time to exit from first PE investment by yearAs of 12/31/2020, Source: PitchBook

Average Median

2006

4.31

2007

4.17

2008

3.86 3.84

4.465.00

6.29

6.92

5.62

6.89

5.97

7.15

6.546.88

7.91 7.87 8.06

6.73 6.797.00

8.118.57

8.35

7.08

6.36

6.02

5.315.02

5.285.20

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

In addition, a balance between limited partner expectations around fund timelines and new market realities for hold periods likely contributed to this trend. However, while preparing for a prospective sale, companies are still under pressure to prove the narrative behind such value creation and demonstrate room to grow, especially with such protracted timelines.

08

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2013

2013

2014

2014

2015

2015

2016

2016

2017

2017

2018

2018

2019

2019

2020

2020

Global median exiting backers (#) per PE-backed companyAs of 12/31/2020, Source: PitchBook

Global average exiting backers (#) per PE-backed companyAs of 12/31/2020, Source: PitchBook

100%

100%

0%

0%

Acquisition

Acquisition

Buyout

Buyout

IPO

IPO

Additional backingThe number of PE backers for companies going public has also slightly increased. As secondary buyouts grew in popularity and M&A remained a popular route throughout the second half of the 2010s, IPO volume was more variable than in prior years for PE-backed companies. Combined with gradually prolonged tenures, there was more occasion for additional backers to acquire minority stakes in expanding enterprises prior to their public debuts. As both retail and index managers’ appetites for exposure to multiple types of businesses remain voracious, demand for mature PE-backed companies that can reach relative financial stability along with solid growth prospects will remain intact going into 2021.

09

Differentiation of ownershipThe rising incidence of secondary buyouts speaks to the establishment of value propositions for distinct phases of company ownership. This implies not only clear due diligence between successive PE owners but also the need to demonstrate the sequential evolution of a company’s progress to prospective acquirers or investors. Utilizing a rare cut of PitchBook data to examine exit activity for companies that underwent at least one previous PE buyout showcases a significant, linear rise in such activity throughout the 2010s. This rise and subsequent peak in 2018 speak to PE fund managers’ appetites for targets overall, although the taper over the next two years may indicate some investor caution and cyclical effects. 2020 has observed the slowest rate of such repeat secondary buyout activity in some time, highlighting that attribution of enterprise value creation across different ownership can be difficult to establish in any tumultuous environment, requiring more diligence and sale preparation.

2006 2007 2008 2009 2010 2011 2012 2013

Global SBO activity with companies that have undergone a prior SBOAs of 12/31/2020, Source: PitchBook

SBO value ($b) SBO count

2014 2015 2016 2017 2018 2019 2020

$29.4 $47.2 $30.3 $5.7 $44.8 $47.6 $53.7 $56.7 $81.7 $79.2 $85.1 $114.5 $130.6 $99.2 $68.4

161

236

307

286

248

222

199

160159137

102124

47

81

84

10

SPACs & additional liquidity pathwaysDirect listings and private secondary exchanges for employee liquidity, among other fledgling innovations in liquidity, are not necessarily thought of as much in the PE realm. However, PE-backed companies have still found iterations of these strategies that suit their needs. For example, SPACs dominated headlines in the final stretch of 2020, raising by far the most capital ever. While hardly a new pathway, the volume of SPACs in 2020 speaks to the unique pandemic-related market conditions characterizing the year, wherein investors of all kinds discounted current impacts to bet on longer-term growth and economic recovery. Expansive fiscal and monetary stimuli also aided in the rebound of the financial markets, fueling investor appetites. Although some SPACs are explicitly geared toward acquiring mature tech unicorns (more commonly venture-backed), some PE-backed companies may also get snapped up, offering another path to liquidity for the right handful of PE portfolio businesses.

11

2010 2011 2012 2013

SPAC registration in the US over the past decadeAs of 12/31/2020, Source: PitchBook

Total amount raised ($b) Exit size ($b) Exit Count

2014 2015 2016 2017 2018 2019 2020

$0.1 $0

5 9 12 1017

2033

4757

248

12

$0.5 $0.1 $0.3 $0.1 $0.8 $0.2 $0.8$1.3 $0.2 $1.4$0.2 $0$2.7 $2.1

$8.8 $9.9$11.6

$3.3

$75.3

$15.0

Looking forward

Reviewing quarterly momentum through the end of the year, we see that 2020 remained subdued relative to prior highs after the initial shock in Q2, although 2019 first saw this gradual decline in quarterly exit volume as acquirers grew skittish amid a high-priced environment. It remains to be seen if ongoing pandemic-related economic impacts deflate the broader acquisition multiple level, although financial market conditions do not currently point that way.

Global PE exit activityAs of 12/31/2020, Source: PitchBook

Exit value ($b) Exit count

IPOs will remain an attractive pathway if equity markets retain their exuberance. PE fund managers may look harder at fellow PE sponsors’ companies. However, IPOs should prove consistently popular as long as buyers can prove out differentiated approaches and exercise suitable due diligence. All in all, the exit environment remains marked by relative confidence as we begin 2021.

12

2018 2019 2020Q1 Q1 Q1Q2 Q2 Q2Q3 Q3 Q3Q4 Q4 Q4

800 778731 768

677

606653

625585

300

398 493

$267$136$202$138$188$233$211$168$255$220$259$264

In private equity, the goal is not just realizing returns, but keeping investors motivated to continue investing. From that perspective, the way you handle the deal lifecycle—preparing for an exit, deal marketing, running a smooth due diligence process—can make all the difference. The leading PE firms have learned this lesson well. They use high-quality, repeatable processes that take the friction out of due diligence, not just to make life easier for buyers, but to competitively differentiate their brand.

But what are prospective buyers looking for in a high-quality due diligence process? Primarily, speed and simplicity. According to a Datasite global survey of 563 corporates, 67% see due diligence as the most time-consuming stage of their M&A process. They say that due diligence today takes one to three months, on average. It’s one of the biggest areas corporates are looking to optimize, with the majority suggesting that by 2025, due diligence should take “one month or less.”

Sellers also see room for improvement in exit-related processes. When asked about sell-side processes and where digitalization can improve, 44% of PE firms pointed to deal preparation, followed by 33% for the deal marketing process.

We sought to examine where PE stakeholders see the exit process today and how it can be improved. We also investigated the importance of exit preparation and the ways successful PE firms are using deal marketing and sell-side data room technologies to make the process run more smoothly. Turns out, applying the right technologies can take the friction out of due diligence for prospective buyers while enhancing a firm’s brand equity.

13

44%of PE professionals point to exit preparation, then deal marketing (33%), as the two sell-side areas that can benefit most from digitalization today.

PE and their buyers see opportunities for efficiencies

14

When PE thinks about sell-side M&A areas, which

is the most time consuming?

Deal preperation Negotiation

Asset marketing

Closing Exit

Post-merger integration

54%

28%

14%

1%1%

3%

Source: Datasite, “The New State of M&A” survey, February-April 2020

Why is exit preparation important? According to McKinsey research, “a concerted effort to improve exit performance—one focused on readiness, continuing value creation, and transparency—can ultimately have a huge impact on returns.”1

Arguably, exit readiness has never been more important than it is right now. The impact from COVID-19 is lessening and valuations are recovering, so buyers are accelerating the pace of sourcing before valuations peak. And, while the climate for an IPO recovers and SPACs remain a viable exit route, taking steps to prepare for exit now will make it easier to respond to those opportunities as they arise.

When should you start exit preparation? According to the leading PE dealmakers, soon after deal-close. It’s important to get involved right away to strengthen financials and drive long-term initiatives to remedy issues such as environmental, social and corporate governance (ESG) concerns.

PE also starts organizing well in advance, viewing the exit process as an opportunity to enhance the firm’s brand. As early as 12 to 18 months before a prospective exit, some PE firms are working with portfolio company executives to source and populate a secure data room with exit documents. Increasingly, they’re using data rooms with integrated artificial intelligence (AI) to categorize deal documents, accelerate document redaction, and analyze deal data for completeness.

1 McKinsey & Company. Private Equity Exits: Enabling The Exit Process to Create Significant Value, July 2018.

Exit preparation

Case study

Datasite helps a PE firm enhance exit readiness and boost process efficiency by 20%A team of dealmakers at a major PE firm needed a new way to prepare for a portfolio company exit. The firm prides itself on using the extensive experience of its principals as a resource to help grow and add value to their portfolio companies. They are also well-aware of best practices in properly planning and executing an exit.

Secure, collaborative document staging streamlines processes Datasite enables a PE firm to collect the documents it needs and preorganize the data room before opening it up for scrutiny. This allows the firm to take a proactive approach to exit readiness and give external stakeholders a positive impression of the firm. “I use Datasite’s collaborative sandbox capability in pretty much every data room,” says one of the firm’s key dealmakers. “Preparing NDAs and other documents for our data room is typically a months-long process. Datasite lets us stage folders and allow people in our company and third-party consultants to draw documents, sift through them, and stage out what the buyer version of the data room will look like. Datasite is much safer and more efficient than emailing files or hosting them on a network file-sharing area. Without Datasite, we would be sending 250 files back and forth to each other via email. Managing the files and keeping them secure that way would be far more challenging than just using the collaboration space in Datasite.”

Activating the live data room is just a click awayIt’s also easy to shift from preparation to action. “After we use Datasite for the exit preparation period, it quickly and easily converts to a live data room to go live with buyers,” explained the PE executive. “Datasite gives the firm everything it needs for exit readiness, enabling the company to securely share documents with its portfolio company and banker, then go live with buyers more efficiently.”

Using Datasite for exit readiness, we shrink by 20% the amount of time it takes using email, attached files and a folder system.Vice PresidentMajor Private Equity Firm

15

Deal marketing has long been an important stage of the exit process. Today, this process is undergoing a digital transformation from email and spreadsheets to workflow management tools, as deal marketers find current office automation tools too complex and ill-suited for the job.

There has been some progress in digitalizing deal marketing communications and processes, but PE sellers believe much more can be done. Most (70%) assign a medium level of efficiency and effectiveness to their firm’s current process of identifying, marketing to, and tracking potential buyers.

Deal marketingThis shows room for improvement. For example, almost half (49%) of practitioners, when marketing a portfolio company for sale, believe the lack of insights on buyer behavior across deal marketing projects provides the greatest challenge. Many (28%) also complain of poor visibility into activity around specific projects. Deal marketing technologies are continuing to evolve to address these concerns. Tomorrow’s tools should give sellers and advisors greater digital capability to track and analyze buyer behavior and enhance visibility on buyer engagement around specific exit projects. Ideally, they will also add the option to automate and enrich communications with prospective buyers. PE leaders see deal marketing as part of the overall exit process, so apps that can talk to one another during preparation, deal marketing, and sell-side due diligence will drive greater deal team effectiveness.

When marketing as asset for sale, how efficient and effective are PE’s current process of identifying, marketing to, and tracking potential buyers?Source: Datasite, “The New State of M&A” survey, February-April 2020

When marketing an asset for sale, what is most challenging for PE?Source: Datasite, “The New State of M&A” survey, February-April 2020

0%16%11%2%1%

70%

2%

28%

Lack of insights on buyer behavior across mandates

N/A

Poor visibility on activity around specific project

Very low levelProvision of client information on project status

Low levelThe inefficiency and manual nature of the processMedium level Watermarking and emailing teasers, NDAs, etc.High level Very high level

49%

13%8%

16

17

Running a successful sell-side due diligence process is never easy, and PE professionals will say that it’s not only about investor returns. Building a reputation for successful exit management can also play a key role in the firm’s future fundraising success. In other words, the stakes are high.

Demanding buyers expect quality, so there’s no room for error. Yet, a variety of issues can crop up to throw a wrench in the process. A significant number (30%) of corporates cite not having a complete set of deal documents as the issue that slows due diligence the most. Many (37%) go on to say they have withdrawn from deals due to data or cybersecurity concerns. Still others (20%) have withdrawn due to excessive valuation, and others (19%) due to financial weakness or fragility.

What can be done to avoid these types of issues? Start exit preparation early, and work with portfolio company executives using sell-side digital tools that include a more complete set of deal documents. But not just any tools. Even today, many corporate buyers continue to use email and spreadsheets when running a due diligence process. Most corporates (67%) say that due diligence is the most time-consuming aspect of M&A and a significant number (43%) go on to say that due diligence is the one aspect of M&A where technology can help the most. You don’t have to look hard to see the PE opportunity.

It’s time for PE to lean into this issue and take ownership of sell-side due diligence. After all, you can’t always rely on advisors and partners to provide an M&A technology platform that supports buyers the way you’d like them to experience your brand. For this reason, leading PE firms are choosing platforms (versus one-off applications) that not only support the entire exit preparation-to-close process, but that span the entire PE lifecycle. What better way to give stakeholders—buyers, portfolio companies, and investors—a consistent, branded, high-quality experience?

Sell-side due diligence

When corporate buyers think of the following key stages of M&A, which is the most time consuming?Source: Datasite, “The New State of M&A” survey, February-April 2020

Which stages do corporate buyers believe could be enhanced most by new technologies and digitization?Source: Datasite, “The New State of M&A” survey, February-April 2020

Due diligence

Due diligence

PMI

PMI

Deal preparation

Deal preparation

Exit

Exit

Strategy

Strategy

Closing

Closing

Negotiation

Negotiation

Sourcing

Sourcing

Asset marketing

Asset marketing

67%

43%

12% 9% 8%

13% 18% 4% 13% 8%

Recommendations

Three ways to digitize the PE exit processBased on extensive conversations with leading PE firms around the globe, Datasite recommends the following three steps to help improve the efficiency of the PE exit process.

Use AI and machine learning to revolutionize deal preparation and due diligence. The latest AI-driven data room tools can help you:

Automatically categorize thousands of documents in minutes

Allocate and index documents into appropriate folders

Bulk redact sensitive information and data in seconds to ensure GDPR/CCPA compliance and protect strategically and commercially sensitive content

Streamline key activities during the deal marketing phase. Use technology to:

Fully automate buyer tracking, so you can review your project status all in one place—from initial contact to negotiating NDAs, sending CIMs, and receiving IOIs

Perform bulk watermarking of documents and email creation while still owning the communication from your own Microsoft Outlook

Gain real-time insight with instant reporting for senior management and sell-side deal teams

Facilitate a smoother, more successful buyer experience during the most complex and time-consuming stage of the exit process, sell-side due diligence. Use technology to:

Create customized analytics that help you stay on top of your deal with interactive dashboards that track meaningful buyer activities

Apply advanced Q&A tools for efficient and secure collaboration and communication among all parties involved in the due diligence process

1 2 3

18

Fundraise Source + Acquire

Restructure Manage Portfolio

Prepare for Exit

Deal Marketing

Sell-Side Due Diligence/Exit

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Invest in your investmentsSo, now you’re all caught up. You’ve got a picture of what’s happening in PE around the world, as well as some insight into due diligence and the future of managing the exit process. What’s next? It’s time to take action. It’s time for your firm to take concrete steps to:

Prepare for exits earlier Speed up due diligence for prospective buyers Generate higher internal rates of return

With Datasite, you can do all of the above. Just ask the top 20 global PE firms, all of which used Datasite last year. Or, poll the 78,000 PE professionals worldwide who chose to do the same. Datasite is much more than a VDR. From fundraising to exits, we’re a great investment in great investments. For more information on how Datasite can drive success across the PE lifecycle, visit us at Datasite.com.