What is Liquidity Event: Its Definition and Example


Key Takeaway:

  • Liquidity event is an event that allows investors to exit their investment and convert equity into cash. This event can take the form of an IPO, merger & acquisition, leveraged buyout, secondary market sale, recapitalization, or private equity investment sale.
  • The purpose of a liquidity event is to provide a way for investors to get a return on their investment and for business owners to receive liquidity. This event benefits business owners by enabling them to access capital for growth and reduces financial risk. On the other hand, investors benefit from a liquidity event by being able to monetize their investments and realize gains.
  • An example of a liquidity event is an IPO, where a private company offers shares to the public for the first time. Another example is a merger & acquisition, where one company buys another. A leveraged buyout occurs when a company is acquired using a high amount of debt. Secondary market sale is the process of selling private shares to other investors. Recapitalization and private equity investment sale are also types of liquidity events that allow investors to exit their investment.

Are you looking to understand a liquidity event and its purpose? This blog post will offer detailed guidance, outlining what a liquidity event is, the purpose it serves, and an example of its application.

Definition of Liquidity Event

Liquidity events refer to financial transactions that enable investors or companies to convert their investments or assets into cash. These events can take various forms, including mergers, acquisitions, public offerings, or private equity sales. The primary purpose of a liquidity event is to provide liquidity to investors while facilitating the growth or exit strategy of the company. By going through such an event, companies can obtain the necessary funds to fuel their expansion or mergers and acquisitions. Furthermore, investors can realize their investments by cashing out.

The different forms of liquidity events can have diverse implications for the company and its stakeholders. For example, a public offering might generate high visibility, increase the stock value, and signify a significant milestone for the company. However, it also entails various reporting requirements and shareholder obligations. In contrast, a private equity sale might involve less public scrutiny, enable greater flexibility and autonomy, but require forfeiting some control over the company. Regardless of the form, the need for a liquidity event arises from the investors' or companies' desire to realize the value of their investments or assets.

One unique aspect of liquidity events is that they often result in a change of ownership or control. For example, in mergers and acquisitions, one company takes over another, and in public offerings, ownership is dispersed among numerous shareholders. This transfer of ownership or control can have significant implications for the company's culture, management, and operations. Therefore, a successful liquidity event requires careful planning, execution, and communication to promote a smooth transition and ensure stakeholder satisfaction.

An example of a liquidity event is Facebook's initial public offering in 2012. Through the IPO, Facebook raised $16 billion, making it one of the largest tech IPOs in history. Moreover, the IPO resulted in Facebook stock becoming publicly traded on the NASDAQ stock exchange, allowing investors to buy and sell shares easily. The IPO signaled a significant milestone for Facebook, indicating the company's growth and potential. However, it also put Facebook under greater public scrutiny and regulatory obligations, requiring the company to balance its stakeholders' interests while continuing to innovate and grow.

Purpose of Liquidity Event

To fathom the meaning of a liquidity event for businesses, weigh up the advantages for entrepreneurs and investors. Break it down into subsets to get a clear picture of how a liquidity event can work as an answer to the aims of those involved. The rewards for each group will differ, yet both can benefit from a successful liquidity event.

Benefits to business owners

As a result of the liquidity event, business owners can reap various rewards. These benefits include:

  • Significant wealth creation- Business owners can gain this reward from selling their company's shares.
  • Reduced risk- Owners who sell shares in their business can significantly reduce their investment and risk. Moreover, they increase the chances of capitalizing on other investment avenues.
  • Potentially free up cash - With the help of a liquidity event, owners can potentially free up their liquid and eases the cash flow crisis at individual as well as organisational levels.
  • New growth opportunities In some cases, proceeds obtained from a liquidity event such as IPO or Acquisition could be utilized for further high-growth investments and expansion projects.

Business owners must critically assess each benefit based on different succession plans to evaluate how substantial it would be if pursuing this form of exit strategy against other forms.

Recently, Mr John had his business acquired via a well-managed Liquidity event. The acquisition enabled Mr John to mitigate any potential financial risks that arise from ownership stake in his business. In return for the acquisition, Mr John received considerable cash upfront which he invested heavily in stock market bonds with tremendous success, allowing him now to focus on expanding his life long passion towards non-profit work.

Why settle for a pat on the back when you can get a pay day? Investing in a liquidity event is like winning the lottery, but with better odds.

Benefits to investors

Investor Advantages during Liquidity Event

During a Liquidity Event, investors benefit from several advantages, including substantial financial returns, lower risk exposure, diversified portfolios, and improved marketability. Specifically designed transactions are initiated by companies during almost all stages of growth cycle allowing investors who take part in them receive exceptional benefits at each step.

  • Financial Returns: The most significant incentive for investors in a liquidity event is the potential for outsized returns compared to other investment strategies. Investors can expect substantial cash payouts that translate to higher dividend yields and stock valuations.
  • Risk Mitigation: By investing in private companies through equity or debt investments, investors take on significant risks. However, a liquidity event provides the opportunity to reduce these risks by either selling their shares or receiving payouts that reduce overall risk exposure.
  • Diversification: Participating in a liquidity event offers investors an opportunity to diversify their portfolio holdings by reinvesting the proceeds into other companies or asset classes with different risk profiles.
  • Marketability: Involvement in a liquidity event makes it easier for investors to exit from investment positions if they wish. It raises the popularity of private companies and stock prices, leading to increased buyout activity and provides better prospects for selling those investments on the secondary market if necessary.

One example would be Airbnb's IPO which helped its early stage backers make strong returns due to the demand surge post-IPO. These gains allowed them to re-invest into new opportunities leading to further development of innovative solutions.

When it comes to liquidity events, it's not just about selling shares - it's about finally being able to afford avocado toast.

Example of Liquidity Event

Gaining insight into what a liquidity event is and how it works? Examples can be helpful. Like an IPO, M&A, LBO, secondary market sale, recapitalization, and private equity investment sale. Each shows a different way to put liquidity into action. Seeing how it all works can be eye-opening.

Initial Public Offering (IPO)

The process of bringing a private company to the public financial market is known as the first sale of shares or Initial Public Offering (IPO). At this event, the company moving from private to public offers its stocks to institutional investors and the general public for the first time. During the IPO, shares are sold at a specified price, and the proceeds are used for business expansion.

An IPO provides several benefits including increasing brand recognition, raising capital, and providing an exit strategy for early investors. Going public also brings visibility and access to potential customers, partners, and employees.

Companies that plan for an IPO must adhere to regulatory requirements such as disclosing financial data and filing annual reports with regulatory authorities. However, companies can use IPOs as a way to realize significant liquidity while maintaining control over their operations.

One example of a successful IPO is Alibaba Group Holding Limited which went public in 2014 on the New York Stock Exchange. The IPO raised $25 billion making it one of the largest initial sales of shares in history.

Why bother falling in love when you can just merge and acquire?

Merger & Acquisition (M&A)

Merger and acquisition (M&A) is a corporate strategy of combining two or more companies to create a larger entity. It involves buying, selling, or dividing businesses with the aim of achieving strategic goals such as increasing market share, expanding into new territories, and diversifying product lines. The process can be complex and involves legal, financial, and operational considerations.

M&A transactions can take different forms such as:

  • Horizontal mergers, where two competing firms in the same industry merge.
  • Vertical mergers, where a company merges with its supplier or customer.
  • Conglomerate mergers, where unrelated businesses merge.

The success of M&A depends on various factors such as compatibility of culture and management style, integration of systems and processes, due diligence, valuation accuracy, regulatory compliance, and communication with stakeholders.

Unique details about M&A include:

  • The role of investment bankers as intermediaries between buyers and sellers.
  • The impact on employees who may face layoffs or changes in job roles.
  • The potential benefits for shareholders through increased stock prices or dividends.
  • The risk of failure due to poor planning or unexpected challenges.

According to a report by Deloitte on M&A trends for 2021, global M&A activity reached $2.4 trillion in H1 2021, up 131% from H1 2020. The report highlights the increased focus on technology-related acquisitions, cross-border deals driven by geopolitical shifts, ESG considerations influencing deal-making decisions, and SPACs emerging as an alternative way to go public.

"Watching a leveraged buyout is like watching a great white devour a seal, except the seal has no choice in the matter."

Leveraged Buyout (LBO)

A highly leveraged acquisition of a company by using borrowed funds is referred to as a Debt-financed Buyout (DFBO). In a DFBO, the buyer uses the assets of the target company as collateral to secure financing. The in-house management team or a private equity firm typically initiates this complex transaction.

DFBOs are usually executed when investors believe that they can improve the performance of the target company better than its current owners. In such transactions, returns can be generated through reducing expenses, optimizing operations, and growing revenues. However, it also involves significant risk because of high leverage.

Pro Tip: Before initiating DFBOs, investors must examine all relevant aspects like market conditions and strategic planning carefully. It is essential to know how much debt should be taken for acquisition and what possible outcomes may arise due to this decision.

If only my ex had been as willing to sell their shares as quickly as a secondary market sale.

Secondary Market Sale

For a Secondary Market Transaction, an investor buys or sells shares that have already been issued. Here are the main points:

  • The sale takes place between two investors, rather than through the company itself.
  • The price is determined by supply and demand, rather than being set by the company or underwriter.
  • These deals can occur on any number of marketplaces, including stock exchanges and private markets.
  • Secondary sales offer liquidity to early investors who want to cash out their investments.

Regarding Secondary Market Sale, it is worth noting that investors may sell their holdings in a company for any number of reasons. This could be because they need money for personal reasons or because they simply want to reallocate their investments elsewhere. Interestingly, according to Investopedia, secondary market sales accounted for $8.5 trillion in activity in 2019 alone.

Source: Investopedia

Recapitalization - when your company needs a financial makeover, and a new outfit just won't cut it.


A strategy deployed to improve the financial structure of a company by altering its capitalization. This involves reducing the equity portion of the company's balance sheet while simultaneously increasing its debt by issuing bonds or taking out loans, which generates cash that can be used for various purposes including repurchasing stock, settling debts, or financing growth opportunities.

Recapitalization is commonly used when a business needs to raise money without diluting ownership or altering control. It is often seen in cases where a company wants to expand operations but doesn't want to issue more shares and thereby reduce shareholder value. Recapitalization gives companies an opportunity to change their corporate profile by adjusting their risk profile

By refusing a large loan from JP Morgan in 1998, Bear Stearns was ill-prepared for the subprime mortgage crisis and went bankrupt during the market crumbling of 2008.

Because money talks, private equity investors walk away with bags full of cash after a successful investment sale - leaving the rest of us to console ourselves with our empty wallets and dreams of striking it rich.

Private Equity Investment Sale

As a critical aspect of private equity investment, the divestment of an ownership stake in a company is referred to as a liquidity event. This can be achieved through various means such as acquisition, merger, initial public offerings, or sale to a strategic buyer. A successful liquidity event results in the generation of capital and enables investors to realise their profits.

A Private Equity Investment Sale sees a privately held business being sold entirely or partially to an external party. Private equity firms typically sell companies that they have acquired using borrowed funds to generate higher returns for their investors. These transactions involve more complex negotiations and require extensive due diligence by all parties involved.

One important factor to consider in this type of divestiture is the valuation of the company. The valuation process involves assessing a company's financial data and business operations to estimate its worth. Investors must ensure they are getting a fair price for their investment while buyers seek to acquire businesses at reasonable prices.

According to Forbes, the highest private equity deal ever was the $45 billion takeover of Texas electricity utility TXU Corp by KKR and TPG in 2007.

Before jumping into a liquidity event, make sure you've considered all the factors - otherwise, you might just end up swimming in shark-infested waters.

Factors to consider before a Liquidity Event

Before initiating a Liquidity Event, several crucial factors require careful consideration. These involve assessing the overall market conditions, creating contingency plans, regulatory hurdles, financial standing, and determining the optimal time to execute the transaction.

Below are the five vital factors to consider before a Liquidity Event:

  1. Market Conditions: Analyze prevailing market trends and conditions to ensure that the market is favorable to raise capital, sell the business, or merge it with another. This analysis should also include a review of the broader economy and how it could impact the investment climate.
  2. Contingency Plans: Develop a plan to deal with potential risks and contingencies that could arise from the Liquidity Event, such as a failed merger or a sudden drop in revenue. Consider developing multiple options to minimize future risks.
  3. Regulatory Hurdles: Research the legal and regulatory requirements for a Liquidity Event. This research may involve identifying the necessary approvals, permits, and licenses required from regulatory bodies.
  4. Financial Standing: Evaluate the organization's financial health, including liquidity, debt to equity ratio, and cash flow before deciding on a Liquidity Event. The purpose of this evaluation is to estimate the company's value and understand how much investment capital it requires.
  5. Optimal Timing: Determine an optimal time to execute the Liquidity Event. This determination may involve analyzing industry trends, market demand, and internal factors like current financial benchmarks.

It is also crucial to be mindful of unique details while undertaking a Liquidity Event, such as selecting the right legal and accounting firms to help navigate the transaction. Additionally, adopting a pragmatic approach could help mitigate external market volatility and support business operations while closing the transaction.

In summary, before executing a Liquidity Event, it is vital to weigh the above-discussed factors, which are essential to ensure a successful transaction. Incorporating thoughtful consideration will help organizations maximize returns, limit potential risks, and streamline the entire process.

Five Facts About Liquidity Event: Definition, Purpose, Example:

  • ✅ A liquidity event is a financial event that allows a company or investor to sell securities, assets, or ownership stake in a company for cash. (Source: Investopedia)
  • ✅ Liquidity events provide a source of liquidity, allowing owners and investors to realize their investment and assets' cash value. (Source: Cooley)
  • ✅ IPO, M&A, and secondary offerings are examples of liquidity events. (Source: Entrepreneur)
  • ✅ Liquidity events can help companies raise capital, provide an exit strategy for investors, or facilitate corporate restructuring. (Source: The Balance)
  • ✅ The decision to pursue a liquidity event should align with a company's long-term goals and financial objectives. (Source: Forbes)

FAQs about Liquidity Event: Definition, Purpose, Example

What is a liquidity event?

A liquidity event refers to a financial event in which a company provides its shareholders or investors with the opportunity to sell or liquidate their ownership positions in the company. This can provide a significant source of cash for investors and can also enable companies to raise capital for future growth or expansion.

What is the purpose of a liquidity event?

The primary purpose of a liquidity event is to provide shareholders or investors with an opportunity to sell their ownership positions in the company and receive cash in return. This can provide investors with much-needed liquidity while also enabling the company to raise capital for future growth, expansion, or other initiatives such as acquisitions or debt repayment.

What are some common examples of liquidity events?

Some common examples of liquidity events include initial public offerings (IPOs), mergers and acquisitions, and direct private share sales. IPOs involve a company going public and offering shares to the general public, while mergers and acquisitions involve the acquisition or merger of one company by another. Direct private share sales allow shareholders to sell their ownership positions to other investors outside of public markets.

What are some potential risks associated with a liquidity event?

Some potential risks associated with a liquidity event include a potential drop in share prices, which can occur if investors do not see the value in the company's future potential. Additionally, a liquidity event can result in a significant amount of change within a company, which can lead to uncertainty and potential disruptions in the short term.

How can a company prepare for a liquidity event?

Companies can prepare for a liquidity event by first identifying potential liquidity event opportunities that align with their goals and objectives. They can then work to build strong relationships with shareholders and investors, ensuring that they are informed and engaged throughout the process. Additionally, companies can work to strengthen their financial position and operations in preparation for a potential liquidity event.

Can a liquidity event benefit both a company and its shareholders?

Yes, a liquidity event can benefit both a company and its shareholders. By providing shareholders with an opportunity to sell their ownership positions for cash, the company can raise capital for future growth or other initiatives. Additionally, a liquidity event can help increase visibility and exposure for a company, which can lead to increased opportunities for future partnerships, collaborations, and growth.