Steven M. Davidoff identified the four main kinds of private equity deal structures being used by private equity funds in the wake of the 2008-09 financial crisis. Writing for the New York Times’ DealBook blog in June 2010, Davidoff described these four structures:
- All-equity financing. The private equity firm provides full equity financing for the transaction, providing equity financing letters for the equity. The target has full recourse to the private equity fund to collect the equity financing under these letters, and can demand specific performance (i.e., demand that the fund complete the transaction).
- Debt and equity financing with specific performance. The PE firm provides equity financing but also obtains debt financing from a consortium of banks. If the bank financing debt is available and the conditions to completion in the acquisition agreement are otherwise satisfied, the target can sue to force the private equity firm to complete the transaction. This means that the target can sue to force the buyer to draw on the equity commitment letters and, in some variations, force the private equity buyers to sue the debt providers to provide debt financing. If the financing fails, then a reverse termination fee is paid in the amount of 4 to 10 percent of the transaction value.
- Debt and equity financing without specific performance. This is a “reverse termination fee model.” The target cannot force the buyer to complete or specifically perform the acquisition. Instead, the buyer can walk for any reason. However, if the buyer does choose to walk from the transaction, it is required to pay a reverse termination fee. This termination fee is typically 4 to 10 percent of the deal value and is the exclusive remedy.
- Debt and equity financing with two-tiered reverse termination fee. The purpose of the dichotomy (two tiers) is to separate out unintentional breaches from breaches where the buyer is at fault. The first, higher reverse termination fee is payable if the breach of the agreement by the buyer is willful.
Read the full article by Davidoff (a professor at the Univ. of Connecticut School of Law), with actual examples of each structure.
“Private Equity Transactions,” by Jeffrey A. Blomberg, published in Business Law Today (American Bar Association), January/February 2008. Blomberg is a lawyer with Pullman & Comley in Stamford, CT.