Why cashing in on private equity ownership needs a clear plan of action

Wealth planning

While private equity partners can realise considerable wealth from initial public offerings (IPOs) or stake sales, it's essential they protect that wealth by planning ahead.


In recent years, prominent private equity firms such as Bridgepoint and TPG have gone public with their firms through IPOs. This can help them create a balance sheet and fund future growth; TPG, for example, raised US$1 billion in the process.

“Identifying the best way of realising the value tied up in their firms is the driving force of our team’s conversations with general partners,” says Edward Dickinson, head of European Leveraged Finance and Sponsor Coverage at RBC Capital Markets in Europe.

For general partners (GPs) and shareholders in private equity businesses, a listing can provide a significant windfall – Reuters reported that 40 percent of the capital raised in the TPG listing would go to shareholders looking to cash out.

While IPOs can release significant wealth for partners, they aren’t always the desired route. “They are massively complex, can take considerable time and require a complete re-plumbing of the organisation,” says Dickinson. “As a result, it is more common for partners to sell a share of their stake in the business, as it can be done much faster and is far less challenging.”

The importance of planning ahead

Regardless of whether a GP chooses to sell a stake or benefit as a result of an IPO, these transactions can have a transformative effect on the individual’s personal liquidity and wealth profile.

“We’ve worked with a number of partners who have seen their personal asset base change significantly because of an IPO or stake sale,” explains Edmund Holzapfel, head of the Private Equity Professionals team at RBC Wealth Management in the British Isles. “The clients were aware of the benefits of having access to more liquidity, but unprepared for the risks and other opportunities the transaction would present.”

While Holzapfel believes this is typical when it comes to IPOs, with the deal being front of mind and personal matters being put on the back burner, he says a general lack of planning among such professionals is also quite common.

“Private equity partners are typically working to tight schedules and are very time-poor, to the point where their personal planning takes a backseat for many years,” he says. “In short, they tend not to look at their own planning until the transaction has completed, which can be too late.”

This approach can leave them open to all sorts of risks, including unexpected tax liabilities and potential future impacts on cash flow, carried interest and fund distributions. With this in mind, the importance of planning ahead of an IPO or stake sale can’t be overstated.

Getting the most out of an IPO or stake sale

In order to understand where to begin, we’ve outlined some of the main considerations for partners approaching an exit.

1. Understand the position before the transaction occurs

“Individuals need to really understand the ownership structure of their stake, because this will affect how they realise the funds down the line,” says Nick Ritchie, senior director of Wealth Planning at RBC Wealth Management in the British Isles. “Do they hold direct shares or units in a fund structure? Or is it a partnership? Once they understand what they own, they can be clearer on what options are available to them and any potential roadblocks to maximising value on exit.”

Typical here is a “lock-up” period after an IPO, in which individuals are restricted from selling their newly listed shares for a period of time – usually between six and 12 months, but in certain cases up to five years. This not only affects liquidity but can have a broader knock-on effect.

“We’ve had clients who want to buy property post-transaction, and they need to work with a lender who can take into account their total financial profile, including the newly listed but locked-up shares in addition to their carried interest,” says Ritchie. “The ability to borrow at a high loan-to-value ratio against a property is also helpful when it comes to preserving their cash for future commitments. Be it the next venture, future fund commitments, or simply funding personal spending on luxuries they want to enjoy before the lock-up expires.”

2. Mitigate tax exposure where possible

There are multiple possible tax impacts that can occur at different stages and should be considered, with Ritchie citing the “trifecta” of income tax, capital gains tax and inheritance tax as priorities. Taking these into account will have a direct effect on the extent to which partners can maximise their wealth post-transaction.

Selling listed shares post-IPO, for instance, will trigger a capital gain, so the timing of the sale could be key. If sold at the start of the tax year, the tax doesn’t become due until a maximum of 18 months later. “It then may be possible to use short-term strategies to deliver yield on capital set aside to pay that bill, in that interim period,” explains Ritchie.

“More broadly, it’s possible to obtain tax reliefs and defer tax by reinvesting sale proceeds in companies raising capital under the UK Government’s Enterprise Investment Scheme (EIS) – this includes inheritance tax reliefs, providing the EIS qualifying shares have been held for two years. Investors have an annual allowance, so this will only be appropriate for a portion of the wealth received.”

Indeed, inheritance tax is a critical consideration both before and after a transaction. Pre-IPO, a partner may have an interest in their firm through a limited liability partnership. “Once that interest takes the form of listed shares, the asset becomes tangible and could mean a significant increase in the size of their UK inheritance tax liability,” says Holzapfel.

3. Think about broader wealth planning and working with the right team

Considering how partners can release substantial sums post-IPO or stake sale, a holistic view of wealth planning is critical. Questions will arise around how much needs to remain liquid; if any purchases or investments are planned, what those investments look like and what is the attitude to risk; and does any estate planning, such as establishing trusts, need to be undertaken?

These should be viewed in the context of any potential tax implications, the timescale and extent to which a position is being monetised and how big a change the wealth represents to the individual’s current financial position.

Working with the right team of advisors: accountant, solicitor, banker and financial planner, can ensure the right decisions are taken at the right time.

“It’s important to pause and take a step back,” says Ritchie. “On a basic level, a significant liquidity event such as this can mean a drastic change in outlook, personal and family goals. As such, working with advisors who can not only get the plumbing right with the financial structure, but also offer objective and constructive challenge to the mental and emotional elements of the journey, can be an unexpected benefit for these individuals.”

4. Carried interest and multi-currency exposure

While many of the factors above apply to founders and partners in any business undertaking an IPO or a stake sale, there are certain matters that are particularly pertinent to individuals in the private equity space. These include carried interest, performance fees and multicurrency exposure, which can have implications way past the point of transaction.

A common pain point amongst UK-based partners involves management of their multi-currency exposure. The majority need to meet fund commitments and receive carried interest or distributions in U.S. dollars or euros while their expenses and regular income might be in sterling.

“Non-sterling exposure can be magnified if the firm decides to list in the U.S. or the EU, where share values will not only be subject to daily share price movements but also foreign exchange risk,” says Holzapfel, who suggests that hedging strategies may help offset some of that risk. These can have potential tax and wealth planning implications that partners need to factor in.

While it’s understandable GPs may focus solely on the IPO or stake sale, it’s critical they start a conversation with their advisors at the earliest opportunity. This will ensure they protect their existing and incoming wealth in the most effective manner.

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