There are several key opportunities for private-equity investors to directly affect the performance of individual investments. At the closing of a new investment, EGLs standard terms are designed to optimize returns by defining a Preferred security with certain liquidation, dividend, and redemption rights. These rights can provide a return on investment for companies that, for whatever reason, are not suitable for a trade sale or a public offering.
At EGL, we have had great success with trade salesmergers or acquisitions by larger, typically public, companies. Since we have each had operational responsibility at large corporations, we can often act as a bridge, communicating successfully with both sides of the transaction. Nearly half of investments to date have been purchased in trade sales, including some that have generated our highest returns. In several cases, the EGL partner on the board has strongly influenced management and other board members to take an attractive trade sale opportunity rather than hold out for the ever-receding bonanza of an IPO.
We have been involved in four initial public offerings and two secondary offerings. For some companies, tapping the public appetite for small high-growth equity is the most efficient path to obtaining the financial wherewithal for continued growth. EGLs general partners have served on public boards, and we understand the promises and the pitfalls of the IPO process.
We are concerned about the impact of Sarbanes-Oxley and the new FASB guidelines for expensing employee option grants. In the long term, these measures will probably prove to be inappropriate for small companies. However, in the near term, it is likely that compliance with these measures will reduce the ability of small companies to go public.