A wave of take-privates by private equity and institutional investors is upon us and is growing momentum – what can investors and management teams do to optimise the management incentive arrangements?
Our firm has acted for management teams on over 70%* of the private equity or institutional investor led take-privates of companies listed on the London Stock Exchange with a value in excess of £1bn in the last 12 months. We have also assisted management teams in a number of take private transactions in the United States.
There has been a significant number of publicly listed companies which have been acquired and de-listed (“taken private”) by private equity and institutional investors in the last 18 months and that number looks set to increase in coming months, particularly in the UK and the US. The opportunities available for investors to take a company private and create meaningful value clearly continue to outweigh the perceived risks and complexity associated with executing a take-private transaction. This is the case even as going public has become an active exit for private equity owned companies.
The regulatory framework in the UK is clear when it comes to management incentive arrangements in the context of a take-private transaction: management incentive arrangements are either agreed and disclosed as part of the 2.7 announcement or nothing is agreed until post-closing (unless those arrangements are disclosed). The practices in the United States are similar. This creates a challenging dynamic for both investors and management teams.
The following key trends are worth noting:
- When are terms agreed?
- In the majority of take privates, management terms have been agreed post-closing, however there have been exceptions to this approach. The key factors driving whether terms are agreed pre or post deal often include:
- a sponsor’s need for a financial commitment from key managers before committing to the deal
- concerns around public disclosure of the management incentive arrangements giving rise to shareholder scrutiny and lawsuits
- execution risk – the focus is on getting to the 2.7 announcement or US equivalent as fast as possible thus moving the management incentive discussions to a later stage in the process.
- Financing arrangements
- A combination of equity commitment from the sponsor and acquisition debt commitment from lenders will usually be required for cash confirmation purposes. Pre-closing, sponsors will often lead rating agency presentations and aim to lock in the ongoing debt terms. Management input is key in this process and gives rise to a challenging dynamic – management are heavily involved in the financing discussions but have no clarity as to their future incentive terms at that stage. Often they need to confront how to answer questions on their future role with certainty unclear, especially as to terms of future compensation.
- Investor consortiums
- We are increasingly seeing investors form a consortium in order to execute deals at the larger end of the market. This is not limited to take-private transactions, but any large sponsor acquisition. Where a consortium is in play, early consideration needs to be given to the ultimate exit route and the interaction of future exits (or partial exits) by one or more of the initial consortium members with management liquidity. This is increasingly important as investors with different time horizons are forming consortiums.
- Treatment of existing incentives – to accelerate or not?
- Prior to the completion of a take-private, the PLC remuneration committee or US Board Compensation Committee will need to determine the treatment of the existing LTIP / incentive arrangements. Although exact treatment will vary from deal to deal, there is usually some element of acceleration on the existing LTIP arrangements. It is well known that management investment (skin in the game) is a key requirement for private equity investors. In the context of a take-private, the accelerated LTIP (or equivalent) payments often forms the starting point for discussions regarding management reinvestment.
- Communication is key
- Taking into account all of the above, a take-private transaction often creates uncertainty for management teams and employees. It is therefore critical that investors and management communicate regularly and build their relationship in the period between 2.7 announcement or US equivalent (and particularly the subsequent shareholder approval) and de-listing. Whilst operating within the regulatory framework, it is also very helpful where the investors introduce the PLC CEO and CFO to management teams of their existing portfolio companies and give an insight into how they have structured incentive arrangements historically.
Take-privates are on the rise – we expect the rise of take-private transactions to continue in the coming 12 months.
Management teams need to be prepared – we recommend that any executive manager of a listed company who may be the subject of a take-private should (i) look to understand at an early stage how a private equity structure works and the key principles, (ii) look to understand what financial commitment expectations there are and how new incentives will replace the current incentives and (iii) give consideration as to how the incentive arrangements could apply in their specific business. Early preparation ensures management are ready to progress incentive discussions efficiently from a well-informed basis – in our experience this leads to the best outcomes.
Stephen Maxwell is a senior director in the team at Jamieson and has extensive experience with take-private transactions
*Based on take-private transactions of London listed companies by private equity or institutional investors in the 12 months to 30 June 2021 as announced on MergerMarket.