Equity carve-out (ECO), also known as a split-off IPO or a partial spin-off, is a type of corporate reorganization, in which a company creates a new subsidiary and subsequently IPOs it, while retaining management control.
[1][2] Only part of the shares are offered to the public, so the parent company retains an equity stake in the subsidiary.
The transaction creates two separate legal entities, the parent and the daughter company, each with its own board, management team, CEO, and financials.
Equity carve-outs increase the access to capital markets, giving the carved-out subsidiary strong growth opportunities, while avoiding the negative signaling associated with a seasoned offering (SEO) of the parent equity.
Carve-out entities need a clear understanding of what their new stand-alone status means in terms of numerous accounting concepts and they must establish accounting policies in line with their operations.