Understanding Liquidity Events: Exiting Private Company Investments

A liquidity event is a process by which an investor liquidates their investment position in a private companyPrivately Held CompanyA privately held company is a company’s whose shares are owned by individuals or corporations and that does not offer equity interests to investors in the form of stock shares traded on a public stock exchange. and exchanges it for cash. The main purpose of a liquidity event is the transfer of an illiquid asset (an investment in a private company) into the most liquid asset – cash.

A liquidity event is a form of the exit strategyExit StrategiesExit strategies are plans executed by business owners, investors, traders, or venture capitalists to exit their position in an asset at a certain point utilized by private equity firms. Usually, the event is carefully planned long before it is triggered. It is typically triggered when certain conditions are met or particular circumstances have arisen. The founders of the company and the investors are the primary parties interested in the event.

Forms of Liquidity Event

1. Initial Public Offering (IPO)

The company’s shares become publicly traded after an IPOInitial Public Offering (IPO)An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is. The company’s founders and investors may sell their shares and monetize their initial investments.

2. Direct Acquisition

Instead of going public, the company or a stake in the company can be sold directly to an interested party (e.g., private equity firmTop 10 Private Equity FirmsWho are the top 10 private equity firms in the world? Our list of the top ten largest PE firms, sorted by total capital raised. Common strategies within P.E. include leveraged buyouts (LBO), venture capital, growth capital, distressed investments and mezzanine capital.). This is another method of monetizing an initial investment.

Reasons for a Liquidity Event

A liquidity event can be triggered due to the following reasons:

• Profit target is reached
• Loss prevention
• Legal reasons
• Dramatic change in market conditions

Example of a Liquidity Event

PE Partners is a private equity firm that invested $5 million in NewTech Corp., a technology startup. In its five years of operations, NewTech Corp. has experienced significant growth and become very profitable. In order to raise additional financing for further growth, the company’s management decides to undertake an IPO.

PE Partners assesses the market conditions and the company’s growth potential and concludes that an IPO would be the best way to liquidate their investment. During the IPO, PE Partners sold their stake in NewTech Corp. for $25 million.

Additional Resources

Thank you for reading CFI’s explanation of a Liquidity Event. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Capital StructureCapital StructureCapital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure
• Cash ReservesCash ReservesCash reserves are funds that companies set aside for use in emergency situations. The cash that is saved is used to cover costs or expenses that are unplanned or unexpected. In most cases, the reserves are specifically for short-term needs. One benefit of cash reserves is that the company can avoid credit card debt or the need to take on additional loan debt.
• Current AssetsCurrent AssetsCurrent assets are all assets that a company expects to convert to cash within one year. They are commonly used to measure the liquidity of a
• Founders StockFounders StockFounders stock refers to the equity that is given to the early founders of an organization. This type of stock differs in a few important ways from common stock sold in the secondary market. Key differences are (1) that founders stock can only be issued at face value, and (2) it comes with a vesting schedule.