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Private Equity Under Dynamic Market Conditions:
Portfolio Company Management & Key Deal Terms
In association with
N ov em b er 2 0 0 9
www.m er g er m ar k et . c om
Private Equity Under Dynamic Market Conditions:
Portfolio Company Management & Key Deal Terms
02
www.mergermarket.com
Foreword
03
Methodology
03
Analysis
04
The Purchase Price Earn-Out: PotentialFuel or Dealmaking
17
Perspectives rom an Investment Banker
20
Historical Data
25
About mergermarket
26
Contents
Private Equity Under Dynamic Market Conditions:
Portfolio Company Management & Key Deal Terms
03
Distressed M&A Outlook
www.mergermarket.com
MethodologyForeword
Welcome to Private Equity Under Dynamic Market Conditions:
Portfolio Company Management & Key Deal Terms
, published bymergermarket in conjunction with Akin Gump Strauss Hauer & FeldLLP and BMO Capital Markets. This survey highlights emergingtrends in private equity portolio management and its proessionals’usage o transaction terms, conditions and nancing techniques inthe current market.Deal terms have been subject to close scrutiny since the onset othe nancial crisis, due largely to their pivotal role in high proledeals. The lapsed buyouts o Huntsman Corporation and BCEInc., both o which lapsed largely because o material adversechange (MAC) clauses and solvency issues, are just two exampleso transactions that have impacted public awareness o specicprivate equity deal terms.Not surprisingly, most respondents have paid particularly closeattention to MAC clauses in the past year: 71% o respondents haveincorporated MAC clauses into buyer closing conditions during thistime, making this the most widely used closing condition amongrespondents this year. In the year ahead, respondents expect to seean increase in the usage o MAC clauses specically as well as anincrease in the usage o buyer closing conditions in general.The private equity industry has indeed been adjusting to the driedup credit markets, but the industry has not necessarily become lessaggressive. In act, 61% o respondents say their targeted returnshave remained unchanged or the past several years. Respondents’use o seller nancing to und deals has also remained steady:58% o respondents report that over the past year, seller nancingor earn-outs accounted or up to one quarter o the total purchaseprice, and 53% o respondents say seller nancing or earn-outsaccount or the same portion o the purchase price on currentinvestments as compared to 2007 or earlier.While most respondents use the same amount o seller nancingas they did two years ago, their reasons or using seller nancingtoday seem to have adjusted to current market conditions. 54%o respondents say they use earn-outs primarily to address thegap between buyer and seller expectations, a gap which 81%o respondents do not expect to narrow until next year. Moretraditional uses or seller nancing, such as incentivizing ormotivating management, are expected to be less prominent.Respondents’ approach to their portolio investments also speaksto current market conditions: more than hal o respondents whoare delaying planned exits intend to do so or at least one year, duelargely to the unavorable valuation climate or sellers. During thistime, 42% o respondents say improving operational perormancewill be their primary objective.In terms o industry-specic predictions, the large majority orespondents will not change their sector ocus in the upcomingyear. But o the respondents who do plan to change their sectorocus, the Consumer and Technology industries are each citedby 67% o respondents as the industries they expect to gravitatetowards in the coming months.Overall, the outlook or the upcoming year is optimistic. 81% orespondents expect valuation gaps between buyers and sellers tonarrow in 2010, with 45% estimating in the rst hal o the year and37% estimating in the second hal.This survey provides an in-depth look at how the private equityindustry is applying specic terms and conditions to currenttransactional activity, working around unprecedented nancingdiculties and managing their current investments. We hope yound this survey both useul and inormative, and as always, wewelcome your eedback.In the third quarter o 2009, mergermarket interviewed 75 senior levelprivate equity practitioners in North America to gauge their sentimenton current portolio management strategies and expectations ornegotiating deal terms in the current market. Respondents providedinvaluable insight into trends in the usage o specic deal terms, aswell as a detailed outlook or the upcoming year. All respondents areanonymous and results are presented in aggregate.
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