This is an extract of our Management Buyouts And Private Equity Funds document, which we sell as part of our Private Acquisitions Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.
The following is a more accessble plain text extract of the PDF sample above, taken from our Private Acquisitions Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Management Buy-Outs and Private Equity
Ads and disads for M of participating in an MBO Ads
- potential for really big capital growth
- less restrictive/more flexibility than floating (basically private co. flexibility)
- incentivisation - personal efforts go towards their rewards
- not restricted by listing co procedure
- fund likely to leave in 3-7 yrs - could be a pro - on secondary b/o M often given chance to buy more equity
- PEF offers skill/expertise
- PEF often revise e'ee contracts and cull pointless staff - leaving more of the profits for M
Types of PEF activity
Return of investment/Exit
- usually have to use personal wealth (as M) to buy in - take out loan/debt fin against their personal assets
- dilution of equity thr/ratchet provision if IRR [Internal Rate of Return - ideal profit calculated by PEF] not made
- PEF might restrain M in the form of covs and in the form of good leaver/bad leaver cl's
- maximum potential equity for M is set out
beginning -> no potential to exceed as ratchets only ever work downwards
- Ws - although mainly for flushing out info re T - d'ors are still made personally liable (usually capped 3 yr's salary)
- fees involved (eg. lawyers) will need money to cover this as well
- PEF takes control - can appoint/remove d'or, reserve right to appoint chairman and execs and negative covs (saying what T can't do)
Venture capital - funding of new business Development capital - funding of existing, more mature businesses (3) B/o -funding of purchases of established businesses (1) flotation of Newco1 on a recognised exchange (2) sale of N1 to trade B (3) secondary b/o (1) (2)
Position of M and their Duties and Obligations to be borne in mind during the Negotiations
Position of M, Duties and Obligations to be borne in mind during negotiation
- Directors' Duties: M have d'ors' duty to act in a way that will promote success of co for existing s'ers (s.172 CA) as well as duty to declare interest (s.177)
- M must therefore make sure they obtain highest price for T and to obtain lowest Ws (but they themselves are the B!)
- Duty to exercise r'able care and skill and diligence (s.174 as well as fiduciary duty in e'ent contract).
- E'ent contract: as e'ers they owe T good faith = unlikely that interest of both co's will be the same: eg. time, confidentiality (M will get a confidentiality letter from T giving permission to avoid breach of their duty)
- Action? in practice, d'ors who are part of MBO will not participate, any retiring/independent d'ors will act as S or if none existing, T will appoint independent d'ors to do the job. M who participating in MBO must retire [cf. board mins] to avoid this conflict of interest
- What to do before approach to PEF?
- DD to reduce risk/liability
- PEF will ask M For Ws (not as contractual redress but) to flush out info
Ratchet IRR What is exit?
What is purpose of ratchet and how goes it work?
Internal Rate of Return - level of return PEF want to achieve via capital and income time when PEF want to achieve their capital gain thr/selling their shares
- used to incentivise M, usually set something attainable
- To work out - take the current number of shares [X] as 20% so divide by 20 then multiply by 100 to work out what new number of shares post ratchet would be
- Then minus X as number of shares M already hold will never chance so new M s'ing = Y
- Minus however many shares M already own (X) and the remaining number will need to be converted to ord shares on a successful ratchet
Tax issues on a PEF MBO BVCA Memorandum of Understanding conditions:
- BVCA is optional but if you sign up for BVCA Memo it's a safe haven conditions for ensuring shares for M are taxed under CGT not income by HMRC when the shares are sold by M to achieve their capital gain so in practice everyone does it
Buy the full version of these notes or essay plans and more in our Private Acquisitions Notes.