The size of private equity rollovers has decreased as a percentage of equity value since 2015, according to law firm Goodwin’s 2018 Rollover and Incentive Equity Survey.
This is down to a combination of the continued robust debt market and higher valuations, which enable sellers to rollover a meaningful amount of capital at a lower percentage of the total post-closing capitalisation of the target company.
Produced by the firm’s Private Equity Group, the report focuses on a wide range of recent trends and issues that are critical to private equity investors, entrepreneurs and managers when negotiating a deal.
Now in its third edition, and previously published in 2013 and in 2015, the survey analyses terms of rollovers and incentive equity in middle market buyouts. Topics include the scope and nature of rollover securities, characteristics of sponsor securities, and terms of sellers’ rollover securities. The survey also reviews the structure and size of management equity incentive pools and offers data for incentive equity in terms of vesting equity and buyback prices.
The report reveals how the practice of requiring some level of rollover has also decreased, down to 63 per cent from just over 70 per cent in 2015.
There has also been a marked shift toward the use of profits interests to incentivise managers.
The average size of the management equity incentive pools offered by the sponsors responding to this survey was 9.51 per cent, down from 11.3 per cent in the 2015 survey and 12.6 per cent in the 2013 survey.
A larger portion of the pools are being reserved for independent directors – and that portion is coming from the portions previously allocated to CFOs and other C-level officers but not from the CEOs.
Produced by the firm’s Private Equity Group, the report focuses on a wide range of recent trends and issues that are critical to private equity investors, entrepreneurs and managers when negotiating a deal.
“Rollover and incentive equity are among the most important economic aspects of any deal,” says John LeClaire, co-founder of Goodwin’s Private Equity Group. “Our 2018 Rollover and Incentive Equity Survey is a useful tool that helps facilitate discussions about which terms are appropriate in the context of a particular transaction. We look forward to continuing to partner with our clients and the study’s participants as we keep this research up-to-date.”
“With each edition of our proprietary survey, we have continued to observe and capture the evolution of trends in the middle market,” says Jon Herzog (pictured), partner in Goodwin’s Private Equity and Technology Companies Groups. “Getting rollover and management incentive equity terms right is one of the principal ways a private equity investor can win over a founder or management team.”
