Liquidity event is when an investor in a private company liquidates their current investment position in exchange for cash.
When an investor in a private company liquidates their current investment position in exchange for cash, it is called a liquidity event. The primary reason for this circumstance is the transfer of the illiquid assets to a liquid asset. Private equity firms use a liquidity event as an exit strategy. Generally, this is planned long before the process is triggered. Only when certain conditions arise or when the conditions are met is when the process is triggered.
Investors and the founders of the business are the main parties involved in this event. The liquidity event has two forms, an initial public offering and a direct acquisition. In the case of an IPO, the company’s shares are publicly traded, and the investors and founders can sell their shares in the open market. In the case of a direct acquisition, the founder can sell the business’s stake directly to another party interested instead of going public.
A dramatic change in the market, loss prevention, legal reasons, or achieving the profit target can trigger a liquidity event. For instance, let’s say GC partners is a private equity company that invested $700,000 in Zero corp, a tech startup. Within the first five years of its operations, the company makes tremendous growth and massive profits. For further growth, the management decides to issue an IPO. They ran an analysis and concluded that an IPO is the best way to raise funds. The IPO was successful, and GC partners sold their holding stake for $4 million.