Equity Carve Out
What is an Equity Carve-Out?
An Equity Carve-Out (also known as an IPO carve-out) is a corporate restructuring strategy where a parent company sells a minority stake (usually up to 20%) in one of its subsidiaries to the public through an Initial Public Offering (IPO).
The parent company retains control of the subsidiary, but the subsidiary now becomes a partially independent, publicly traded company.
How It Works?
- The parent company creates a new legal entity for the subsidiary.
- A portion of the subsidiary’s shares is sold to public investors through an IPO.
- The parent receives cash proceeds from the share sale.
- The subsidiary gets its own management, financial reporting, and sometimes a separate board.
Key Features
- Partial divestment: Only a portion of equity is sold (typically ≤ 20%).
- Parent retains control: Majority stake remains with the parent.
- Separate financials: The carved-out subsidiary has its own balance sheet and income statement.
- Public market presence: The subsidiary gets listed on a stock exchange.
Why Companies Do Equity Carve-Outs
| Reason | Explanation |
|---|---|
| Unlock Value | Helps the market independently value the subsidiary, especially if it's fast-growing or very different from the parent. |
| Raise Capital | Generates cash without taking on debt or giving up control. |
| Strategic Focus | Allows each business to focus on its core operations and strategy. |
| Preparation for Full Spin-off | Often a first step before a full spin-off or divestiture. |
Example
Suppose a large conglomerate owns a fast-growing fintech subsidiary. To raise funds and unlock the fintech’s true value, the parent company sells 15% of the fintech’s shares via an IPO. The subsidiary now trades independently on the stock market, but the parent still owns 85%.
Drawbacks or Risks
- Dilution of control over time if more shares are sold.
- Increased regulatory compliance and costs for managing a separate public entity.
- Market pressure on the carved-out subsidiary to perform independently.
Equity Carve-Out vs. Spin-Off
| Feature | Equity Carve-Out | Spin-Off |
|---|---|---|
| Cash to Parent | Yes (via IPO proceeds) | No cash proceeds |
| Ownership Post-Deal | Parent retains majority | Shareholders get new company shares |
| Public Listing | Yes, for the subsidiary | Yes, for the spun-off company |
| Control | Parent keeps control | Parent typically relinquishes control |