10 Observations and Current Trends

1. Competition between traditional buyout funds and long-term capital and infrastructure funds has intensified resulting in more bespoke approaches on key management terms such as reinvestments, synthetic liquidity time periods and managed leaver provisions, with both Sponsors and Management teams looking for optimal solutions

2. Interest from alternative asset funds such as Asian and Middle Eastern sovereign wealth and direct pension funds, with several looking to undertake first direct investment deals

3. Planning for longer hold periods resulting in more focus on manager succession and transition arrangements. This is increasingly featuring in discussions with buyers and management’s commercial terms, although often limited to a small number of key senior management

4. Equity capital structures required more scrutiny than ever given the variety of different fund types, fund geography and investor commercial structure preferences. The choice of capital structure significantly influences the investment risk / reward profile for management teams. With a fixed amount of management investment, the decisions around equity capital structure can be the difference to managers between an expensive sweet equity only deal or a more balanced sweet equity and co-investment deal

5. More focus during due diligence on the tax valuation support for ‘inflight’ equity awards made during the seller’s investment period, frequently having significant impact on process timetables and the need to put in place buyer protection mechanisms

6. The pursuit of buy and build strategies to consolidate sectors resulted in creative economic packages for management with “top up” and “evergreen” sweet packages more accepted than in past years. These packages often provide equity for incoming ’target company’ managers as well as managing the level of sweet dilution

7. GP led fund-to-fund and continuation fund transactions as a form of exit for Sponsors. In the majority of cases, these transactions were treated as exits with management incentives partially cashed out with the balance rolled into co-investment and new incentive structures

8. Sponsors retaining minority stakes, either via the same fund or a new fund – in many cases these transactions circumvented the need for a full auction process, often providing buyers with additional comfort to bridge a perceived pricing gap

9. Sponsors bringing in minority investors to provide partial liquidity as well as growth capital resulting in questions for management around timing of exit and partial tag along rights

10. Increased competition from strategics, especially private equity backed trade. This can result in attractive packages for management involving majority cash out and participation in a new equity incentive plan, in many cases with a shorter time horizon to a future exit than the competing standalone private equity bidders would offer.