Managers demand better terms in private equity deals

Management teams of UK companies are taking advantage of a highly competitive buyout market to push for better financial terms when they are acquired by private equity firms, according to lawyers and advisers.

Leaders of acquired companies have been agreeing more generous deals regarding the shares they receive if certain targets are met. They have also benefited from changes to so-called ratchets, where the management team gets some of the upside when a buyout firm makes a big profit when selling a portfolio company.

Meanwhile, management teams are pushing for terms that allow them to cash out more of their investments in a company if it gets sold by one private equity firm to another. Leaver provisions – terms that apply when management leaves the company before the private equity house sells – are also improving.

Paul Dolman, head of private equity at Travers Smith, said: “There is a lot of competition for the best assets.”

“Given that there are generally three variables to winning an auction: price, deal deliverability and management preference, where the race is tight, management may ultimately have the whip hand on which buyer will win the deal.”

Such terms are being discussed earlier in the bidding process compared with a few years ago, according to Simon Cope-Thompson, a partner at M&A advisory business Livingstone Partners.

He said: “We often try to get a term sheet [to discuss the management terms] in the second round. There’s certainly more understanding that this is important.”

Stephen Drewitt, a partner at law firm Macfarlanes, added that management teams were now also better represented at the negotiating table, saying: “If you were to track back to ’06, often the management advice was only an add-on to someone else’s role.”

However, management teams are focusing less on protection for themselves if a deal goes wrong and more on getting a bigger slice of the cake, according to David Allen, a partner at Baker & McKenzie.

He said: “When the financial crisis happened, you saw a number of portfolio companies going bust and management teams losing all of their equity. There was significant focus on downside protection as result. Slowly but surely, some of those concerns became less front of mind.”


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