What is a liquidity event?

A liquidity event is primarily defined as a situation where investors have the opportunity to convert their equity in a company into cash, typically through means such as a sale of the company, an initial public offering (IPO), or other similar transactions. This concept is crucial for investors as it provides them with a chance to realize the value of their investments after holding for a period of time, thus improving the overall liquidity of their investment portfolio.

The other options do not accurately capture the essence of a liquidity event. Distributing company profits as dividends relates to profit sharing rather than providing liquidity to investors looking to exit their investments. A financial report showcasing annual earnings is more about assessing past performance rather than enabling cash realization. An acquisition that combines two companies into one might not necessarily provide liquidity to investors, as the transaction could result in shares in the new entity or other outcomes that do not involve immediate cash out. Hence, the correct interpretation of a liquidity event centers on the aspect of transforming an investment into cash.