A ‘fund to fund’ deal is a transaction where a private equity house invests in a company it already owns, providing liquidity for some or all of the existing LPs while retaining ownership of the company.

This type of transaction can take several forms: one example is where the Sponsor sells from one fund vintage to another (often in conjunction with the sale of a minority stake to a third party investor); another, where the ownership is transferred to a continuation fund, which can be used to extend the hold period of the asset; and a third is where the Sponsor sets up a special purpose entity (which it controls) with both new and former investors to acquire the business.

Whilst shareholder agreements have historically not recognized fund to fund transfers as “Exit” events, in the majority of deals on which we have advised they have been treated as such. However, this is not always the case, and in situations where this type of transaction has not been treated as an “Exit” it can be hard to address some of the management considerations that are often necessary to cater for the extended hold period.

Our team has specialist experience and a track record of supporting management teams and working with companies through fund to fund transactions. A fund to fund treated as an Exit provides the opportunity to “reset the clock” on management incentive plans (e.g. lock in management value created to date, remove legacy leavers’ shares, top up recent joiners’ incentives and rebalance the incentives to reward the key managers driving the next phase of the business plan). There is also a cash out component that needs to be agreed and managed from a tax planning perspective.

Also, refer to our article GP led Fund to Fund transactions – “too good to sell”!

P2P

There has been a significant increase in private equity and infrastructure investors looking for value creation opportunities in the public markets over the last few years, and consequently a large number of take-private transactions. We offer market leading advice to management teams involved in take private situations, and utilize our extensive take-private experience to help teams navigate the process and regulations as well as maximize their incentive opportunities with the new owner.

We help management navigate the process in a manner that appropriately discharges their duties to shareholders whilst securing ongoing incentive arrangements that align senior management with the new investor. In addition, we help managers to discuss what can be discussed with a bidder in respect of management incentive arrangements (and when it can be discussed) and the interaction of such discussions with public disclosure requirements.

It is critical that the process of transitioning from typical public company incentives (LTIPs, options, RSUs) into a private company environment is managed correctly to ensure key employees are retained and key leaders are clear on their deal in short order, such that any disruption to the business is minimized.

Also, refer to our articles To P2P or not? and CEO Negotiation Timing and Preparation in Go Private Transactions

IPO

We also provide independent advice to management teams entering the public company arena. We help challenge and agree what incentives are needed to carry teams into the public markets.

Listing private equity owned businesses often requires careful consideration of the impact on existing equity incentive plans. The strong alignment between managers and investors within a private environment can diverge at the point of listing, with conflicting objectives as regards pricing, sell-down, lock-ups, post IPO restrictions and future public company incentives.

Often run alongside a trade or secondary buyout process, we will provide objective analysis of the proposals being made to management and the financial implications of each outcome, modelling the differences between LTIPs and value creation plans, whilst giving a qualitative analysis of other commercial terms.

Also, refer to our article Going Public – the revival of the IPO as an Exit route: A view from Europe

Infrastructure and long term capital investors are increasingly adopting private equity style incentive arrangements; however, there are a number of fundamental differences as compared to traditional private equity, including target returns, hold period and capital structure, that need to be catered for in the structuring of the equity incentive arrangements.

We advise on the management terms on deals with sovereign wealth funds, asset management funds, and long term private equity, and are experienced in creating synthetic liquidity mechanisms to provide increased visibility of future liquidity on equity incentives. Synthetic exit terms are increasingly common in long term capital deals and there are several tried and tested mechanisms, though some funds still wish to leave determination of future liquidity vague and open-ended.

More so than before, infrastructure funds are putting in place equity incentive arrangements rather than more traditional LTIPs. With large transactions it is important to understand the complexities of having several capital investors, especially if there is further investment planned over the hold period.

It is especially important with infrastructure and long term funds to link the terms, i.e. rollover is only made with equity incentives being offered. Having determined rollover, the issues of leaver arrangements and future liquidity need to be agreed – all these terms are equally important and interconnected.

We can advise you in modelling and assessing the impact on your management equity program from follow on M&A and structuring to ensure the optimal treatment at the point of the transaction.

M&A Equity Funding 

Whether M&A targets are acquired through the existing company or a new company (new Holdco) is formed, we align management teams’ financial interests with investor interests and protect against adverse equity dilution from acquired businesses. Visibility and protection around management incentive terms from M&A can be incorporated into commercial term sheets and negotiated in advance.

In the case of bolt on M&A this tends to be structured under the current Holdco and existing incentives remain in place. Considerations include:

• the amount of dilution from any further equity funding to the extent that protections were not put in place at the outset; and
• the availability of equity to incentivize incoming target managers and/or top up equity to cater for shortfalls.

In cases of substantial transactions, which can be defined when terms are agreed in the buyout process, it is often a case of a new Holdco being set up, businesses valued and all shareholders (investors and managers) rolled up the structure into new institutional equity, with a new management equity program put in place across the combined business. This requires more planning work as current equity incentives are rolled into common equity and the equity incentive program is re-set – an assessment of standalone returns versus combined returns, leaver provisions and allocations need to be undertaken.

Capital Raising

We also provide strategic advice to owner managers, founders and management teams on raising debt and equity capital. Whether funding a start-up, acquiring a platform business, raising growth capital, delivering a partial exit for shareholders, or to fund bolt-on acquisitions, we draw on our years of experience running processes and agreeing capital structures to align new investors, existing shareholders and management teams to maximize future value creation.

We have a team of modellers to support finance teams in situations such as modelling M&A transactions, GP led Fund to Fund or continuation Funds, refinancings and minority equity sell-downs.

M&A Equity Funding

Whether M&A targets are acquired through the existing company or a new company (Newco) is formed, we align management teams’ financial interests with investor interests and protect against adverse equity dilution from acquired businesses. Visibility and protection around management incentive terms from M&A can be incorporated into commercial term sheets and negotiated in advance.

Partial Exits & Recapitalization

Partial exits have become a more popular strategy for funds which wish to retain high performing assets while generating interim liquidity for LPs and gaining third party verification of valuation. Such transactions pose their own challenges for the sponsor/management shareholding dynamic. In these situations, we help management shape a proposal to accommodate any evolution in the management team (e.g. exiting leavers, re-balancing allocations to high performers), balancing cash-out with existing and incoming sponsor objectives and ensuring go-forward alignment is maximised.

Funds Flow Work

We undertake funds flow work on behalf of the company as part of the buyout process – this is a natural extension of our Buyout Advisory work where we already undertake proceeds and rollover modelling.

MIP Administration

We also provide ongoing support to CHROs as part of the administration of equity incentive plans. For example, we can assist with: onboarding of new managers; updates and education of existing schemes; and Q&A forums and solutions for recycling of unallocated reserve, especially where there are large numbers of manager participants.

Advice to boards and management teams on the design and implementation of cash and equity based incentive plans (including synthetic liquidity mechanics). As part of ordinary course business planning or specific planning ahead of an expected future event, we can help:

• Structure plans (profit interest, growth shares, options and cash-based plans)
• Define economic outcomes / level of payouts – anchor appropriate valuation points at which incentives start to accrete value, and at which they crystallize proceeds
• Benchmark payout expectations against market data
• Design synthetic liquidity mechanics such as put/call options (if required)
• Agree incentive pool allocations and the right breadth of participants
• Propose other commercial provisions around the rights to the incentives (e.g. leaver provisions, minority protections etc.)
• Coordinate external tax and legal advice as necessary, including the information required for a tax valuation

Advice to senior executives joining portfolio companies mid investment cycle on their cash investment and equity incentive packages.

When this involves investing into an existing plan, we bring an independent and objective perspective to analyzing the attractiveness of the proposal being made and, where appropriate, suggest areas for negotiation, amendment or additional protection. When no such incentive plans exist, we can work with incoming CEOs to help establish an appropriate structure with the board/shareholders.

We also work with companies to expand the list of incentive participants via LTIP / phantom incentive plans, which are becoming increasingly popular in the post COVID environment.

Whether proposed changes are driven by shareholders or lenders, management are critical in the execution of any restructuring process, as well as being the driving force behind the ongoing operational performance of the business. Our advice covers both the amendment of existing incentive plans and the effective structuring of new schemes that are fit for purpose in light of changed capital structures, business strategies and trading environments.

We take a collaborative approach in order to understand and assist with:

• All stakeholder objectives and their perspectives on past and future performance
• The evolution of the management team and time horizons of key individuals
• Future value creation through operational (using latest forecasts) and financial scenario analysis (within existing or proposed amended structures)
• Assessment of where future value is reflected in the capital structure and across the various stakeholders
• Assessing management returns against varying investor outcomes and market benchmarks
• Solutions to underwater equity arrangements (i.e. share issues, performance hurdles and ratchets, options, cash-based bonuses) working within existing or amended capital structures
• Preparing a term sheet that captures the commercial proposals and is agreed with all stakeholders ahead of full documentation
• Key tax and legal considerations in structuring and implementing new incentives
• Processing time pressures and coordination of multiple parties and their advisers

Our approach is collaborative, working with all stakeholders to align interests in shareholder value creation and reach agreement on an acceptable new management incentive scheme going forward.

We support owner managers, founders and management teams undertaking formal business sale processes across all industry sectors. Our expertise lies in transactions that are notably management driven, where the interests of multiple parties need to be met in order to conclude a deal. These types of sale often involve complications such as shareholders rolling-over into the buyer’s structure, earn outs or differing forms of consideration for management and non-management shareholders.

Whether this is in Corporates or Private Equity backed businesses, we work with companies to review and set in place sales incentives and retention awards ahead of going into a sale process.

We take into account existing incentive arrangements, and likely treatment in the event of a sale given the type of buyer. For example, if the expected sale is to private equity a portion of the incentive will be expected to be rolled into the new deal, whereas if the sale is to a strategic buyer then it is often attractive to implement a retention sale award that is deferred until a time period post-closing.

We will prepare example structures of new equity incentives that are likely to be used by buyers, and ensure that the current incentives are sufficient to deliver what buyers are likely to require from management in terms of roll in investment, as well as meeting management expectations on cash out. We believe this reduces the expectation gap between sellers and buyers when it comes to management incentives and removes the likelihood of incentives becoming a stumbling block that delays the sale.