How does a private equity firm exit an investment?

Name the three main exits, a sale to a strategic, a sale to another sponsor and an IPO, with a reason and a drawback for each. Separate partial liquidity, like a dividend recap, and say good sponsors plan the exit before they buy.

Updated October 20, 2026

What the interviewer listens for

• Do you name the strategic sale, the secondary buyout and the IPO?
• Do you give a reason and a drawback for each?
• Do you know an IPO is usually a gradual sell-down?
• Do you separate partial liquidity from a real exit?

Common mistakes

• Listing a dividend recap as a full exit.The sponsor gets cash back but still owns the company.
• Saying an IPO returns all the sponsor's money at once.It sells a slice and the rest after a lock-up.
• Leaving out the secondary buyout, a common route when strategics aren't bidding.
• Treating the exit as an afterthought.The exit multiple and timing are among the biggest drivers of the return.

Likely follow-ups

• Why would one sponsor buy a company from another?It may see more growth, plan add-on acquisitions, or be able to put more debt on a business that paid down its debt under the first owner.
• What's a lock-up?An agreement that stops existing holders, like the sponsor, from selling shares for a set period after the IPO, often around six months.
• Which exit usually gets the highest price?Often a sale to a strategic, because synergies let it pay more, though a strong IPO market can match it.

More finance technicals

• In an LBO, what happens to returns if the exit multiple is one turn lower than the entry multiple?
• How do you back into the most a sponsor can pay for a company if it needs a 20% IRR?
• What is a cash sweep in an LBO?
• Walk me through a basic LBO.
• What makes a company a good LBO candidate?

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