Strategic Sale vs Secondary Sale vs IPO: Three Routes Out

Three routes take a private position out in three different shapes. A sale to a buyer in the same industry moves the whole thing to one negotiated counterparty. A secondary moves part or all of it to another investor. An offering moves it to a market in two legs. In Nilgiri Growth Partners Fund II, invented, one holding left by each, and the three multiples do not rank the three routes.

A route out is a shape, not a result. Being blunt about that at the start is worth the space. The arithmetic below sits three numbers next to each other, and every instinct pulls towards reading them as a scoreboard. Three numbers in a row are not a scoreboard. Each of the three routes does something specific and different to a position: one of them ends it against a single counterparty, one of them can shave a slice off it and leave the rest where it was, and one of them converts it into something quoted and then sells it down in pieces. The three routes are separated by what each one does to a position. The multiple each one produced on one fund's record is a separate question with a separate answer.

Everything here is worked on Nilgiri Growth Partners Fund II, an invented closed-end growth and buyout vehicle managed by Nilgiri Alternatives Advisors Private Limited, with Nilgiri Trusteeship Services Private Limited as trustee. The fund bought nine companies. Four of them left by the three routes compared here. Every figure below is that fund's own record as at the end of its Year 9 Quarter 2, the record date in use, and nothing after that date is stated. How each of the three routes actually works, step by step, is covered separately. The three mechanisms are taken as settled, and the one job here is to set them side by side against the same questions.

What do the three routes actually do to a position?

The plainest version needs none of the vocabulary. Suppose a household runs a small sweet shop and wants out of it. There are three quite different ways that can happen. The first is that the sweet shop two streets away, run by somebody already in the trade, buys the whole thing, keeps the ovens, folds the customer list into its own and shuts one of the two kitchens. The second is that another investor, somebody with no interest in making sweets but plenty of interest in owning a business that does, buys the shop as it stands, and can just as easily buy half of it and leave the household with the other half. The third is that the shop is turned into something anybody can buy a slice of, sold in a first tranche to whoever turns up, and the rest sold off later at whatever the going rate is by then.

Each of those three sales is one of the three routes, and the finance versions keep every feature of the sweet shop versions. A strategic saleThe sale of a whole position to a buyer that is already operating in the same industry. moves the entire position to one buyer who already runs something in that line of business. A secondary saleThe sale of part or all of an existing position to another investor rather than to an operating business. moves part or all of the position to another investor, who buys the position rather than the operations. An initial public offeringThe sale of shares to the public for the first time, after which the shares are quoted and can be traded. converts the position into quoted shares and sells them in more than one go.

The three are not three speeds of the same thing; they are three different transactions with three different counterparties, and only one of them has to happen twice. Six questions pull them apart, and the drawing below answers all six at once, so the shape comes before the reasoning. The six criteria come one at a time below, with one fund's actual numbers underneath them.

Who sets the price in each of the three?

Price comes first because it decides who the seller is actually dealing with, and the three answers could hardly be further apart. In a sale to a buyer already in the same industry, one named counterparty sits across a table and argues. There is a person on the other side with a budget, a board and a walk-away point, and the number that emerges is the number those two parties agreed. In a sale to another investor, there is still a counterparty across the table, but the argument is anchored differently: the buyer is pricing a position rather than an operating business, and the conversation starts from the figure the fund itself reports the holding at and moves away from it. In an offering, there is no counterparty at all in that sense. A market makes the price, out of whoever turns up.

Selling a second-hand car makes the same point. Selling it to the garage at the end of the road is one negotiation with one person who knows exactly what he can do with it. Putting it on a public listing site is not a negotiation at all: what a car is worth emerges from the aggregate behaviour of strangers, and none of them can be argued with. The three routes are three different kinds of conversation, and one of them is not a conversation.

The difference between arguing with a person and reading a market has a practical edge. Where one counterparty sets the price, the fund can ask why, push back, and know exactly whose judgement produced the number. Where a market sets it, the fund gets a number nobody has to explain, and no amount of arguing moves it. Neither of those is preferable to the other. The two are simply different, and a seller who expects a market to behave like a counterparty has misunderstood the route rather than been unlucky.

How much of the position leaves, and what is left behind?

Here the three separate cleanly, and one of them has a capability the other two simply do not have. A sale to a buyer in the same industry is a whole-position event. Nobody in that trade wants 40 per cent of a competitor's supplier with a private investment fund still sitting on the rest of it, and the fund is not trying to keep a stub either. The position goes, all of it, at once.

An offering also ends up taking the whole position out, but it does it across two legs rather than one, and in between the two the fund is holding something quite different from what it held before: quoted shares in a company anybody can buy into. The position has changed character before it has finished leaving.

A sale to another investor is the only one of the three that can stop halfway on purpose. A secondary can take the whole position, and in Nilgiri Growth Partners Fund II it did exactly that on holding 2, Konark Polymers Private Limited, in Year 6 Q3. A secondary can also take a defined slice and leave the rest exactly where it was, and a sale of that shape is a partial exitA sale in which some of the position is sold and the rest stays with the seller.. On holding 9, Indravati Packaging Private Limited, invented, 40 per cent of the position was sold in Year 8 Q3 for Rs 22,00,00,000 and 60 per cent stayed with the fund. The ability to leave a slice behind belongs to one of these three routes and to neither of the other two, and it is a difference in what the route can physically do rather than a difference in how well it did.

The fourth bar leaves something out, and the omission matters more than it looks. The record fixes that 40 per cent of holding 9's position was sold. For holding 3, the record fixes how the money split between the two legs and not how the shares split, so what proportion of holding 3's shares went at the offering is not established. Where the case does not lock a number, the gap is left visible rather than filled.

Does the cash arrive in one event, and when does it reach investors?

Two questions live inside this one and they have opposite answers, so they are worth doing together. The first is whether the money arrives all at once. The second is how long it takes to travel from the fund to the people whose money it is. Only one of the three routes splits the first answer, and none of the three changes the second by a single day.

Take the split first. A sale to a buyer in the same industry settles in one event: on holding 1, Sahyadri Diagnostics Private Limited, invented, the whole Rs 2,03,00,00,000 arrived in Year 7 Q2 and there was no second payment. A sale of a whole position to another investor settles the same way: holding 2's Rs 63,00,00,000 arrived in Year 6 Q3 and that was the transaction. Even the partial sale settles in one event for whatever part was sold. Holding 9's Rs 22,00,00,000 arrived in Year 8 Q3 in one payment, and the untouched 60 per cent was simply not part of the transaction.

The offering is the exception, and it is the exception by construction. On holding 3, Tungabhadra Logistics Private Limited, invented, the total was Rs 1,50,00,00,000, of which Rs 60,00,00,000 came at the offering itself and Rs 90,00,00,000 came from selling the retained sharesThe shares a seller still holds after an offering, which have not yet been sold to the market. after the lock-in ended. Worked out on the shares, the picture is exact rather than approximate: 60 divided by 150 is 0.400, so 40.0 per cent of what this holding returned arrived at the offering, and 90 divided by 150 is 0.600, so 60.0 per cent arrived afterwards, and 40.0 plus 60.0 is 100.0 with nothing unaccounted for. There is a small coincidence worth noticing: the first leg of Rs 60,00,00,000 happens to equal what holding 3 cost the fund, to the rupee. An offering is the only one of the three that does not finish the job in one event, and the majority of what it returned to this invented fund arrived on the second leg at a price nobody could know on the day of the first.

Now the second question, and the answer barely varies at all. Every one of the four exits reached investors exactly one quarter after the cash reached the fund. Holding 2 was received in Year 6 Q3 and paid out in Year 6 Q4. Holding 1 was received in Year 7 Q2 and paid out in Year 7 Q3. Holding 3 was received in Year 8 Q1 and paid out in Year 8 Q2. Holding 9 was received in Year 8 Q3 and paid out in Year 8 Q4. Four exits, three routes, one gap, every time.

The one-quarter gap is not a coincidence and it is not a property of the routes. The fund's own documents pay out in the quarter after receipt, and the route has no say in that whatsoever. Because the two things are constantly run together in conversation, the distinction matters. How long a route takes to reach cash at all is a real difference between them, and the locked record carries no number for it. How long the money then takes to reach investors is not a difference at all. A route can change when the fund gets paid; on this invented fund it cannot change the one quarter between the fund getting paid and the investor getting paid.

Who gets to see the inside of the business on the way out?

Disclosure is the criterion readers skip, and it is the hardest of the six to reverse. Selling something means showing it to somebody, and the three routes show it to three completely different audiences.

In a sale to a buyer in the same industry, the party going through the business in detail is a company that already operates in that trade. Because a trade buyer is pricing what it can fold into its own operation, it has to look closely, and it cannot price the fold without understanding the operation it is buying. The consequence is uncomfortable and permanent: a competitor now knows the inside of the business, and it keeps what it learned whether or not the transaction ever closes.

In a sale to another investor, the buyer is not in the trade. The buyer is pricing a position, and works largely from what the fund already reports about the holding plus whatever the company agrees to open up. Nobody who competes with the business has been shown its workings. In an offering, the audience is everybody: a quoted company publishes on a timetable set by a regulator, anyone at all can read it, and the publishing does not stop when the fund has finished selling. Publishing has become the company's permanent condition rather than a step in the fund's exit. Who is allowed to look inside is settled by the choice of route before a price is ever discussed, and unlike a price it cannot be renegotiated afterwards.

What has to be true of the business before a route is available at all?

Almost every discussion of this subject is phrased as a choice, and the phrasing hides the most important thing about it. A route is not picked off a list. A route is available or it is not, and what makes it available sits outside the fund entirely.

Two of the three turn on finding one willing counterparty. A sale to a buyer in the same industry needs a company already in that trade that wants this particular business, at a price the fund will accept. If nobody in the trade wants it, the route is closed for that holding, and no amount of preparation conjures a buyer into existence. A sale to another investor needs one investor willing to take the position on. The bar is lower only in that the pool of investors is wider than the pool of trade buyers, and it is not lower in any way that helps. An investor unwilling at any price is as final as a competitor who is not interested.

The third turns on the business itself. An offering requires a business that can meet the conditions attaching to one, and those conditions are set by the Securities and Exchange Board of India. The conditions change, they are detailed, and the current text at sebi.gov.in governs rather than any summary written at an earlier date. One structural point matters for the comparison, and it does not depend on any particular condition: the first two routes fail when no counterparty appears. The third can fail even with willing buyers queueing, and it fails because the business itself does not qualify. Failing to qualify is a different kind of unavailability, and it is why the third route is the one a fund can be shut out of for years.

Where does the cost of each route show up?

Every route costs something, and the reason people argue about which one is expensive is that the three costs appear in three different places, only one of which is a line anybody can read.

In a sale to a buyer in the same industry, the cost of running the process is inside the price that was negotiated. The cost was argued over before anybody shook hands, and it does not itemise itself afterwards. In a sale to another investor, the cost sits in the gap between the figure the fund reports the holding at and the price actually agreed against it. A discount is a price, and a price has no breakdown. In an offering, the cost turns up as transaction expenses, called from investors in the ordinary way rather than netted quietly off the proceeds. Of the three, only that cost appears as its own number in this invented fund's record. The size of that number, and the drawdown it sat inside, are worked out under the offering as a route.

A reader who looks only at the expenses a fund lists will find one of these three costs and conclude the other two were free. The other two were paid in places a statement does not show. The gap is not a criticism of anybody's reporting. A negotiated price genuinely does not decompose, and asking a statement to show a cost that was never separated from a price is asking for a number nobody ever struck.

What do the three look like on this fund's own record?

Now the arithmetic, all of it in one place. Nilgiri Growth Partners Fund II, invented, bought nine companies. Four of those positions left by the three routes compared here, and every figure below is the fund's own record as at the end of its Year 9 Quarter 2. A multiple with an unnamed denominator has said almost nothing, so the multiple on costProceeds divided by what the position cost, with no allowance made for how long it was held. in the last column is in every case measured against the cost of that same holding and against nothing else.

The last two rows deserve a moment for the neatest arithmetic in the table. Holding 9 cost Rs 25,00,00,000 in total. Selling 40 per cent released Rs 10,00,00,000 of that cost and brought in Rs 22,00,00,000, and 22 divided by 10 is 2.20 exactly. The 60 per cent still held carries Rs 15,00,00,000 of cost and a value of Rs 33,00,00,000, and 33 divided by 15 is also 2.20 exactly. Add them back together and Rs 22,00,00,000 plus Rs 33,00,00,000 is Rs 55,00,00,000 against Rs 25,00,00,000 of cost, and the ratio is 2.20 once more. The sold half and the retained half of holding 9 carry the identical 2.20 times. Rs 10,00,00,000 plus Rs 15,00,00,000 is the Rs 25,00,00,000 the position cost, so the cost check holds too. One of those two figures is cash the fund has received and the other is a value somebody has struck for something still held. Fund reporting settles that distinction, and it is kept rather than blurred here.

How long was each position held, and does the length explain anything?

Nilgiri Growth Partners Fund II counts time from its own final close, so Year 1 Q3 sits 0.75 years in and Year 8 Q1 sits 7.25 years in. Work each hold periodThe time between the money going into a position and the money coming out of it. out on that clock and the four look like this. Holding 1 was entered at 0.75 and sold at 6.50, so it was held 5.75 years. Holding 2 was entered at 1.00 and sold at 5.75, so it was held 4.75 years. Holding 3 was entered at 1.50 and sold at 7.25, so it was held 5.75 years. Holding 9's sold slice was entered at 4.75 and sold at 7.75, so it was held 3.00 years.

Look at holdings 1 and 3 again. Both were held for exactly 5.75 years, not approximately and not roughly, and they returned 2.90 times and 2.50 times their respective costs in Nilgiri Growth Partners Fund II, invented. Two positions held for precisely the same length of time, sold by two completely different routes, produced two different multiples. The length of the hold cannot be the explanation, and neither can the route. Something else made the difference, and that something else was the two businesses.

The equality of those two holds is worth handling carefully. Time is not irrelevant to a private position: a longer hold on the same money changes the annual rate the position earned, a different measure, covered separately and not used here. The point is narrower and sharper. On this particular record, the one variable that would have been the obvious explanation for a gap between two multiples has been held constant by accident, and the gap survived. A small locked record cannot offer cleaner evidence than that.

Why do three multiples not rank three routes?

Put the three headline figures next to each other and the temptation is almost physical. In Nilgiri Growth Partners Fund II, invented, the sale to a buyer in the same industry returned 2.90 times holding 1's cost, the offering returned 2.50 times holding 3's cost, and the whole-position sale to another investor returned 1.40 times holding 2's cost. Three routes, three numbers, apparently in order. Three numbers in that order are very hard to look at without reading a ranking.

What can this comparison establish, and what can it not?

The comparison can establish the shape of each route with some precision, and shape is not a small thing. The six criteria show who sets the price and therefore who the seller is dealing with. The criteria show how much of the position leaves and whether anything can be left behind, and leaving a slice behind is a capability one of these three routes has and the other two do not. The criteria show whether the money arrives in one event, and on this record that separated the offering from the other two and put 60.0 per cent of holding 3's proceeds on a second leg. The criteria name who is shown the inside of the business, and nobody can undo that afterwards. The criteria show what must already be true before the route is open at all. And the criteria show where the cost hides, somewhere different in each case and visible in only one.

The comparison cannot establish which route returns more, and the three multiples do not fill the gap: they measure three businesses. The comparison is a description of three mechanisms and never a ranking of them, and a ranking would claim more than the evidence can support. No general rule tells a particular fund with a particular holding in a particular year which route to take, and ordering the list would imply a rule that nobody can defend.