What does the term 'exit strategy' refer to in private equity?

The term 'exit strategy' in private equity specifically refers to the approach taken to liquidate investments made in portfolio companies. This is a crucial aspect of private equity investing, as it encompasses the various methods through which a private equity firm can realize returns on its investment. Common exit strategies include selling the portfolio company to another firm, conducting an initial public offering (IPO) to sell shares publicly, or recapitalizing the investment.

Understanding this concept is vital because it ultimately impacts the overall success of the investment and provides returns to the limited partners involved. This strategic planning ensures that the firm can efficiently transition its investment back into cash or other resources, highlighting its importance in the lifecycle of private equity investments.

The other options relate to different aspects of private equity but do not capture the essence of what an exit strategy entails. For example, the method used to distribute profits to investors involves returns on investment rather than the liquidation process itself. Similarly, onboarding new investors and the timeline for starting new investments are operational considerations and do not pertain directly to exiting investments.