Royce Stone Capital urges investors to plan exit early

Royce Stone Capital has published an article urging private investors to plan their exit before committing capital. The guidance comes from Chief Executive Officer and Partner Tarek Omar.

Omar argues that investors in private businesses should focus not only on entry, but also on how an investment will generate income or eventually be sold. His article examines the period between investing in a business and realising value from it.

At the centre of the argument is the need to match an investment to its purpose. That means deciding whether the aim is regular income, capital growth or a mix of both, then shaping expectations accordingly.

"Do you want profits from the business, or rapid capital growth, or both?" Omar said.

The article explains how those goals can pull investors in different directions. A profitable company may pay distributions, reinvest earnings to expand, or do both. Each option has different implications depending on whether investors need current income or can leave funds invested for longer.

Omar also distinguishes between backing an early-stage venture and investing in an established business seeking capital to expand. In one case, investors may be funding an unproven concept. In the other, they may support a business with customers, revenue, and a trading record.

He argues that this difference should shape an investor's time horizon and tolerance for loss. Someone seeking steadier returns may view an established company differently from a higher-risk investor prepared to wait for growth from a younger business.

Alignment matters

Another theme is the need for alignment between founders, investment managers and investors. Expectations around distributions, reinvestment and timing can diverge, especially when investors want income while management prefers to retain profit for expansion.

Similar tension can arise over the timing of a sale. Investors may expect to exit within a set period, while management may want to hold on longer to pursue further growth or delay a transaction until conditions improve.

For that reason, Omar argues that exit planning should begin early rather than when investors want their money back. The choice of exit route, and how a business is prepared for it, can affect how value is ultimately realised.

Possible buyers

The article identifies several possible exit routes, including a sale to a private equity buyer, a corporate acquirer, a family office, or a public listing. Each option weighs different features of a business.

A corporate buyer may want to integrate a supplier or add a complementary operation. Another buyer may focus more closely on recurring earnings, the management team or the ownership structure.

That means preparing for a sale involves more than applying a valuation multiple to projected earnings. The business itself must support the investment case sellers want to present to the next buyer.

Omar notes that a public listing can offer access to growth capital as well as a route to liquidity for shareholders. But an initial public offering does not guarantee an exit or a higher valuation, as market conditions, listing requirements and costs still play a role.

Separate outcomes

Royce Stone Capital's article also warns against treating a possible exit as assured cash. Private investments can be hard to sell, and a buyer may not emerge within the expected timeframe or at the hoped-for price.

The article says business growth, an estimated valuation, and a completed sale are separate outcomes. Even when a business performs well operationally, investors may still face delays or losses if market interest is limited or ownership structures complicate a transaction.

The firm adds that patient capital can give a strategy time to develop, but it does not remove investment risk. That point is likely to resonate with private market investors facing longer holding periods and more limited liquidity than in listed equities.

Melbourne-based Royce Stone Capital works in private capital and corporate advisory. Its activities include private lending, business funding and investment structuring.

Omar said investors should consider what future buyers will need from a business before committing their own funds.