Private Equity Deal Structuring

What is the approach of private equity investors?

A private equity investor sees an investment as a partnership with other shareholders and management, which needs to be “win-win” to be sustainable.  A private equity investor is looking to deploy flexibility in deal structuring, because it will give him a competitive advantage over other, more constrained investors.  A private equity investor is looking to align management’s interests with their objective of increasing the value of the company.

Which financial and non financial instruments can exist in a private equity deal structure?

• A private equity investor is able to make use of customised financial instruments such as preference shares, or use more than one financial instrument in a transaction.
• A seat on the board of directors will give the private equity investor influence over company decisions he may not otherwise have.
• Veto rights means there will be a list of company decisions that cannot be made without the approval of the private equity investor, even if he is in a minority in the company.
• A ratchet mechanism is an arrangement according to which, if there is a shortfall, the private equity investor gets compensated proportionately.

What are some obstacles to deals?

Obstacles include high valuation expectations by sellers, reluctance to give up control by founders, image concerns, lack of commitment to exit, difficulty in understanding complex deal structures.  A private equity fund manager needs good communication skills to build trust and acceptance of deal complexities.  This is even more important in Emerging Markets, where there may be less familiarity with private equity.