What is meant by "exit strategy" in private equity?

An "exit strategy" in private equity specifically refers to a plan for how investors will realize their returns on their investment. This involves outlining the methods through which the private equity firm intends to sell or liquidate its stake in a portfolio company, thereby allowing the investors to recoup their initial capital along with any profits generated from the investment.

Common exit strategies include selling the company to another private equity firm or strategic buyer, taking the company public through an initial public offering (IPO), or conducting a recapitalization. The choice of exit strategy is crucial as it impacts the overall returns and the timing of those returns for the investors. Understanding the exit strategy helps investors assess their potential for gain and the timeline for capital recovery, making it a fundamental component of private equity investment considerations.

This clear focus on return realization distinguishes the exit strategy from other business or investment strategies like acquiring new investors, increasing company valuation, or choosing investment opportunities—which are important in their own right but do not directly answer the concept of how investors ultimately benefit financially from their investment in private equity.