Private Equity Transactions:

Overview of a Buy-out
International Investor Series No. 9

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ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN
UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES

OF

AMERICA

Private Equity Transactions: Overview of

a Buy-out
International Investor Series No. 9

Contents
1.

Introduction

2.

Buy-outs

3.

Parties

4.

Financing a buy-out

5.

Process

6.

Documents

12

7.

Exits

15

Appendix
Appendix 1 About this briefing

17

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information
please contact us at Ashurst LLP, Broadwalk House, 5 Appold Street, London EC2A 2HA T: +44 (0)20 7638 1111
F: +44 (0)20 7638 1112 www.ashurst.com
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Ashurst LLP 2013 Ref: 9008033 October 2013

Private Equity Transactions: Overview of a Buy-out

1.

Introduction

Private equity transactions have one common feature: the source of money that is funding
the transaction, namely a fund established specifically to invest in securities.
Traditionally, private equity funds targeted unquoted securities with growth potential in the
medium term and a viable exit strategy through a sale or listing. The target businesses were
capitalised with debt finance as well as fund capital. However, since 2007 that profile has
changed and private equity funds have diversified into non-traditional sectors (including real
estate and distressed businesses) and non-traditional equity structures (including quoted
securities and bonds). Private equity transactions continue to span the full lifecycle of
businesses, from start-ups, through development and expansion to the funding of purchases
of businesses by management teams (buy-outs).
This briefing focuses on traditional buy-outs and looks at:

the different types of buy-out;

the parties involved;

the sources of finance used to fund a buy-out;

the process by which the transaction takes place;

the documents required; and

the exit process for investors.

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Private Equity Transactions: Overview of a Buy-out

2.

Buy-outs

A buy-out is the process whereby a management team, which may be the existing team or
one assembled specifically for the purpose of the buy-out, acquires a business (the Target)
from the Target's current owners with the help of equity finance from a private equity
provider and debt finance from financial institutions. To achieve this, a group of new
companies will be established; at its most simple, this will usually consist of a top company,
owned by the private equity provider and management (Newco), which will act as the
investment vehicle for the investor, and a wholly-owned subsidiary of Newco (Newco 2),
which will act as the purchasing and bank debt vehicle. This structuring limits the recourse of
the debt provider and thus the private equity fund does not guarantee the bank debt.
Buy-outs tend to fall into one of the following categories:

Management buy-out (MBO)

An incumbent management team buys the business it manages. These were traditionally
instigated by management approaching the Target's owners with a proposal to acquire the
business and then take the deal to the funding institutions. This may happen where
management are running a division of a larger group of companies and feel that they are not
receiving the support or investment that they require to enable them to achieve their
business goals.
Where management initiate the buy-out process, they must be very careful to ensure that
they do not breach any duties of confidentiality which they owe to their employers (for
example, by disclosing financial information or trade secrets to potential funders). They
should also be wary of breaching their service contracts (for example, by failing to devote
their energies to the Target's business but, instead, spending their time trying to pursue a
buy-out).
Management should seek appropriate legal advice as soon as possible and, where possible,
obtain their employer's permission to pursue their objectives. The employer's permission
usually involves granting a waiver of any breach of management service contracts which
would otherwise occur. Clearly, the employer can remove this waiver at any time and require
management to desist from pursuing the buy-out.

Secondary buy-out (SBO)

The other, and increasingly common, form of MBO is the secondary buy-out, where a Target
currently owned by a private equity provider and management is acquired by another private
equity provider who backs the same management team. In SBOs, the managers are both
sellers and investors.

Management buy-in (MBI)

A team is assembled by investors for the purpose of making the acquisition, where a
business may have the potential to achieve significant growth but the existing management
team is either uninspiring or not interested in buying the business. Typically, an MBI involves
private equity providers and intermediaries identifying a group of individuals with the
appropriate attributes to undertake an MBI and then matching them with, and transplanting
them into, an attractive target.

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Private Equity Transactions: Overview of a Buy-out

Buy-in/management buy-out (BIMBO)

This is a hybrid, combining an existing management team with an external management
team. For example, the private equity provider may take the view that the management are
mainly good but lack a key individual, for example a finance director.

Institutional buy-out (IBO)

This takes place where a private equity provider independently sets up Newco to acquire the
Target and gives the Target's management a small stake in the business either at the time of
the buy-out or after its completion. The private equity provider may retain existing
management or perhaps bring in new management at a relatively late stage in the
transaction. This is now the most common form of buy-out on mid to large deals. Many may
also be secondary buy-outs (or further follow-on buy-outs known as tertiary, quarternary
etc.).
Buy-outs largely take place with the private equity fund, or a consortium of private equity
funds, taking a majority stake in Newco. Start-ups and development capital usually involve
the private equity fund taking a minority stake. Where it takes a minority stake, the private
equity provider will be much more concerned to ensure that it has veto rights over what the
business does, can protect its directors from dismissal, can control the appointment of other
directors to Newco's board and can force an exit from the business at some time in the
future.

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Private Equity Transactions: Overview of a Buy-out

3.

Parties

A typical buy-out will involve the following participants:

The management team

The team tends to be confined to a small number of core managers until the buy-out has
been completed. On larger buy-outs this core team is often extended after completion to
bring in "second tier managers".

Management's lawyers
The role of management's lawyers is usually restricted to advising management on their
equity investment in Newco, their service contracts, any director-related issues that arise,
together with ensuring that the contract for the acquisition of the Target is not unduly
onerous for management. On smaller management-led buy-outs, management's lawyers
often have a more significant role and may conduct the negotiations on behalf of Newco.

The private equity provider

The transaction will usually be run by one or two executives from the private equity provider
who will play a central role in negotiations relating to all elements of the deal.

The private equity provider's lawyers

Lawyers for the private equity provider will normally be heavily involved in all aspects of the
transaction. They will prepare and negotiate the documents relating to the equity element of
the transaction with management's lawyers. They will also act as lawyers to the Newco group
on its acquisition of the Target from the seller (except on smaller buy-outs when this may be
done by management's lawyers). This will involve carrying out a due diligence investigation
of the Target, negotiating the acquisition agreement with the seller's lawyers and negotiating
the bank facility agreement(s) and bank security documents with the bank's lawyers.

The bank
The bank is responsible for providing the senior debt (and possibly second lien or mezzanine
debt (explained under Debt finance below)). Senior debt is debt that is not subordinated to
any other debt and is intended to rank ahead of other debt on the insolvency of Newco.

The bank's lawyers

Apart from drafting the banking documents, the bank's lawyers will also generally review the
due diligence reports produced by Newco's advisers, keep an eye on the acquisition
agreement and review the seller's disclosures against the warranties.

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Private Equity Transactions: Overview of a Buy-out

Reporting accountants
The private equity provider will usually appoint a firm of accountants to produce a long form
report on the Target, to review management's business plan and to examine management's
financial projections.
Where the buy-out process takes the form of a competitive auction, the seller will have
appointed a firm of accountants to produce a long form vendor due diligence report (VDD) on
the Target. The VDD will be addressed to the successful bidder and Newco's banks.

Environmental auditors
The private equity provider will often ask environmental auditors to carry out an
environmental risk assessment of the Target to assess whether processes carried on at its
properties comply with all relevant environmental laws and whether any contamination is
occurring. On an auction a report produced by the seller's environmental auditor may be
produced to be addressed to the successful bidder and Newco's banks.

Investment bankers
On the very largest buy-outs, a private equity provider will normally appoint a firm of
investment bankers to manage the transaction and to provide strategic advice on the
negotiation of the deal, both with the seller in relation to the sale process and with the banks
in relation to the finance for the deal (particularly if a high yield bond is to be issued).
On start-ups and development capital transactions, the team is often much smaller,
consisting of:

management and its lawyers;

the private equity provider and its lawyers; and

management's accountants, who will be asked to advise on tax and structuring issues.

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Private Equity Transactions: Overview of a Buy-out

4.

Financing a buy-out

The acquisition of the Target by Newco 2 is usually financed from two main sources:

Equity finance
Funds established to invest in private equity transactions obtain their money from a variety
of sources, including institutions (such as pension funds, banks and insurance companies),
companies, individuals and government agencies.
The private equity provider will subscribe for ordinary shares in Newco and will require
management to do the same so that they have an incentive to make the business succeed,
with the possibility of increasing their share on an exit. Such an increase is usually structured
by the use of a performance ratchet in Newco's articles of association which operates in
favour of management.
Any further funds invested in Newco will usually be by way of a combination of preference
shares, loan notes and Luxembourg hybrid securities. Provided that the transaction is
structured correctly, these instruments may be tax efficient for their holders and also for
Newco (as it may get some deduction against profits for interest payments due on those
instruments).
The equity share capital of Newco held by management is often referred to as "sweet
equity", while the combination of equity share capital and loan notes in Newco held by the
private equity provider is often called the "institutional strip". On some buy-outs and SBOs, a
wealthy manager may invest in both the sweet equity and the institutional strip, which
means that for the money in excess of the amount required to purchase his percentage of
the sweet equity, he will be treated as if he were a member of the private equity provider's
investing syndicate.

Debt finance
Debt finance will usually form the largest part of the required funding in a buy-out. The
principal source of this debt is the senior debt which is usually provided by the bank. The
principal component of the senior debt will tend to be a secured term loan to finance the
acquisition. The senior debt may also include a secured working capital facility.
Often, there is a secondary source of debt finance in buy-outs (junior debt). Junior debt,
which is any debt that is not senior debt, will often be provided in the form of mezzanine
finance or second lien, so called because in terms of risk and reward, it lies somewhere
between equity capital (unsecured but with the potential to earn large rewards) and bank
debt (well secured but with lower returns and not carrying the chance of capital growth). In
smaller deals, junior debt may be provided by other forms of subordinated funding such as
an investor loan or a seller's loan note.
Mezzanine funds are invested as debt carrying a higher rate of interest than the senior debt,
usually 3 to 4 per cent over the bank's base rate, because the mezzanine security will rank
behind the senior debt security. In addition to carrying interest, the mezzanine finance may
also be granted rights to subscribe for equity share capital in Newco (warrants), which is
often known as an "equity kicker". The provider of the mezzanine finance will only exercise
the warrants (and subscribe a relatively low amount of cash for share capital) if a sale or
listing of Newco is imminent, on which the mezzanine funder will make a large capital gain. If
the investment is unsuccessful, the warrants are never exercised, so the provider of the

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Private Equity Transactions: Overview of a Buy-out

mezzanine finance is not risking any money in taking the warrants, but there is the
opportunity for a substantial windfall.
A high yield bond or securitisation may be put in place after completion on larger buy-outs,
to replace bank debt with cheaper financing. It is usually the mezzanine finance which is
replaced by the high yield bond or securitisation. The senior and mezzanine debt is normally
provided to Newco 2 in order to structurally subordinate the debt.

Priority
The typical order of priority of investments in the Newco group on a return of capital is as
follows:

the senior debt provided by the bank is paid off first;

the mezzanine finance or second lien finance (if any) is usually paid out next;

any high yield bonds in issue are then repaid;

the loan notes or similar instruments held by the private equity provider are then
repaid (alternatively, if the private equity provider has opted for preference shares
instead of loan notes, these will be redeemed); and

any balance is then shared between the holders of the equity shares in Newco in
accordance with any order of priority set out in Newco's articles of association.

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Private Equity Transactions: Overview of a Buy-out

5.

Process

As mentioned already, the development of the buy-out market means that the traditional
MBO is no longer the standard. Increasingly, a large number of transactions are institutionled and involve an auction process carried out by the seller. However, although such deals
are more sophisticated, the traditional model serves as a useful example of the way a buyout transaction will progress.
On smaller and mid-sized buy-outs, management may have a fairly significant role in
determining which private equity provider will fund the buy-out. On the larger buy-outs, it
tends to be the seller who chooses the private equity provider. On very large buy-outs,
management may not enter into any share incentive arrangements with the private equity
provider until after the deal has been completed.
A buy-out involves, in effect, three transactions:
Equity: This is the deal between the private equity provider and management relating to
their subscription for shares in, and management's employment by, Newco.
Acquisition: This is the deal between Newco 2 and the seller for the acquisition of the
Target.
Finance: These are the arrangements between Newco 2 and the providers of finance for the
acquisition of the Target.

Business plan/information memorandum

Whatever the size of the transaction, the first step is for management to prepare a business
plan (or the seller to prepare an information memorandum in the case of larger buy-outs).
This will explain the Target's background, its financial record and its projected performance
following the injection of funds or buy-out. On smaller buy-outs it will usually be the business
plan that triggers the private equity provider's initial interest in the transaction. On larger
buy-outs and auction sales, the information memorandum is often prepared by an
investment bank.
The private equity providers will often appoint reporting accountants to review this business
plan or information memorandum, although on some smaller transactions they tend to carry
out this review themselves. The review will challenge some of the assumptions on which the
business plan has been prepared. The private equity providers will also wish to recalculate
some of the figures used, on the assumption that different circumstances arise (for example,
lower turnover and higher interest costs), in order to test the viability of the projections.
Only if the business presents an attractive and credible investment opportunity will the
private equity provider take the transaction further.
In the larger auction processes, the information memorandum is designed to elicit indications
of interest at a certain price at the early stages of the auction process.

Equity term sheet

Once the private equity provider has decided, in principle, to proceed, the next step is to
draw up a term sheet. On buy-outs, this will take the form of an offer letter entered into
between the seller and Newco (as buyer). There may also be a term sheet between the

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Private Equity Transactions: Overview of a Buy-out

private equity provider and management setting out what interest management will have in
Newco.
The offer letter or term sheet will often include an exclusivity provision which grants the
private equity provider an exclusivity period during which the seller or management agree
not to negotiate with anybody else in relation to the transaction. On larger buy-outs, the
private equity provider may try to insist upon an exclusivity period, to avoid incurring heavy
costs before it knows for sure that it is not in a race with any other private equity provider or
buyer. Exclusivity is not normally available in the context of competitive auction processes.

Due diligence
Depending on the size of the transaction, the private equity provider will usually undertake
some form of due diligence. A large buy-out may involve the preparation of accountant's
reports on the Target's business, environmental reports on the Target's properties, insurance
reports on the insurance cover maintained by the Target, actuarial reports on the funding of
the Target's pension schemes and market reports on the macro-economic conditions in the
market in which the Target operates. The due diligence exercise helps to highlight areas of
risk for a private equity provider so that it can more accurately assess the attractiveness of
the opportunity. On smaller transactions, due diligence may be limited to particular areas
such as reviewing key contracts, checking the functionality of any important computer
software and checking title to any material property. Some due diligence, particularly
financial, but increasingly legal and other areas, may have been carried out by the seller's
advisers which, in due course, the buyer will be able to rely on. This is generally referred to
as "Vendor Due Diligence" or "VDD".

Negotiations
When the due diligence exercise is completed the parties will negotiate the key legal
documents. In competitive auctions, the seller will try to ensure the documentation is fully
negotiated and agreed during the due diligence period and, to the extent possible, whilst
there is still competition between bidders.

Exchange of contracts
The culmination of the preliminary stages of the buy-out process is exchange of contracts
(referred to in many jurisdictions as "signing") in respect of all three elements of the deal.
On smaller transactions, exchange tends to take place simultaneously with completion
(referred to in many jurisdictions as "closing"), but on larger transactions it is common to
have a split exchange and completion to enable any conditions precedent (sometimes called
"pre-closing conditions") to be satisfied.

Equity
The investment agreement will be signed and will be binding on the parties from exchange,
although no money will be subscribed for shares until completion when all conditions of the
investment have been satisfied. This can create "chicken and egg" problems with the
acquisition agreement at completion because the subscription monies are needed to make
the acquisition but the investment agreement will usually specify that it will not complete
unless the acquisition has been completed itself. In order to break this circle of
conditionality, the investment agreement will often provide that the acquisition must have
completed in all respects save for the payment of the purchase price, at which point the
investment agreement will complete. The subscription monies can then be used to pay the

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Private Equity Transactions: Overview of a Buy-out

outstanding money due on the acquisition agreement, allowing the last component of the
acquisition agreement to complete.
It is on exchange that the due diligence reports prepared by the Newco group's advisers and
any VDD, including that of the reporting accountants, will be signed and dated and will
become effective. Management will also deliver their disclosure letter relating to the
warranties contained in the investment agreement.

Debt
The bank facility agreement will be signed and exchanged. The bank's obligation to provide
its debt finance will be subject to certain limited conditions precedent, all of which must be
satisfied prior to completion. Clearly, the private equity provider, management and the seller
will want to be confident that these conditions precedent can be satisfied at completion and
will be keen to resist conditions outside their control which give the bank rights to terminate
the funding arrangements. Sellers may insist in competitive auctions that there are no
conditions to the financing save for completion of the acquisition so called "certain funds".

Acquisition
The agreement for the acquisition of the Target by Newco 2 will be signed and, subject to
satisfaction of the conditions (if any), will be binding on the parties from that date. The
agreement will contain warranties, which will be given as at the date of exchange and may
be repeated at completion. The other ancillary acquisition documents are usually agreed as
agreed form documents when contracts are exchanged, but (save for the disclosure letter)
are not normally entered into until completion.

Between exchange and completion

The next phase of the buy-out is the period between exchange and completion of the legal
documents. A split exchange and completion may be required to allow the parties to obtain,
for example, regulatory approvals for the sale and purchase, such as EC Merger Regulation
approval or landlord's consent to the assignment of key leasehold properties.
Typically, if there must be a gap between exchange of contracts and completion to allow
conditions to be addressed, the acquisition agreement will provide that their satisfaction is a
condition to completion. A seller will want to keep the number and subject matter of
conditions to a minimum because the deal will usually become public on exchange of
contracts and a failure to complete could be commercially damaging.

Completion
Where there has been a period of time between exchange of contracts and completion,
completion is usually a mechanical process triggered by the satisfaction of all outstanding
conditions. At completion, the private equity provider and management will make their
equity subscriptions in Newco, intra-group loans will be made, the bank(s) will provide their
finance and the acquisition of the Target will complete.

Post-completion
The final stage of the buy-out process is the period after completion during which relevant
statutory filings are made at the relevant registries, documents effecting a transfer of title to

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Private Equity Transactions: Overview of a Buy-out

assets are stamped (if required), stamp duty land tax returns are filed (if relevant) and,
where necessary, changes in title to assets such as real and intellectual property are noted at
the relevant registry.

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Private Equity Transactions: Overview of a Buy-out

6.

Documents

Each of the three elements of a buy-out (equity, acquisition and finance) has its own set of
documents. While the documents govern separate transactions between different parties,
they all inter-relate to the extent that none will become unconditional unless all the others
do.

Equity
The main issues arising out of the equity deal on a buy-out include:

the obligations of the private equity provider and management to subscribe for shares
and other forms of capital in the Newco group;

the running of Newco and its subsidiaries;

the relationship between the private equity provider and management; and

the terms of employment of management.

These matters are dealt with in the following equity documents:

Investment agreement
The investment agreement (also known as the subscription and shareholders' agreement)
governs the relationship between management and the private equity provider. Part of the
document deals with the mechanics of completion of the subscription of shares in Newco by
the private equity provider and management; these clauses will cease to be of concern
following completion of the investment. However, a large part of the document will continue
in force to govern the relationship between management and the private equity provider
until an exit is achieved and will contain the following key provisions:

restrictions on what management can and cannot do with the Target's business
without the private equity provider's consent ("veto rights" or "negative covenants");

rights for the private equity provider to appoint directors to Newco's management and
those of its subsidiaries;

restrictive covenants which seek to prevent management from engaging in competing

businesses or soliciting customers, suppliers or staff for a period of time following
completion of the investment and/or their ceasing to be an employee of, or a
shareholder in, Newco;

restrictions on the ability of shareholders to transfer their shares freely to third parties.
These will usually reflect identical provisions in Newco's articles of association;

an obligation on all parties to abide by the provisions of Newco's articles of

association;

warranties to be given by management to the private equity provider. Management

usually warrant the reasonableness of their business plan and confirm certain factual
information contained in due diligence reports. The private equity provider will rely on
the warranties given by the seller in the acquisition agreement and will also ask
management to confirm that they are not aware of any breach of the warranties given

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by the seller (unless it is an SBO where warranties from the selling private equity
provider are not normally given).
The purpose of the management warranties in the investment agreement is not primarily to
seek a source of financial redress if the warranties are untrue, but more to promote
disclosure of information.
Articles of association
Newco's articles of association set out the rights attaching to its shares, including dividend
entitlements, rights of shareholders on a return of capital and restrictions on the ability of
shareholders to transfer shares. Newco's articles are usually drafted to include pre-emption
rights so that no shareholder can transfer shares without those shares first being offered to
existing shareholders. The pre-emption rights are generally subject to certain permitted
transfers such as transfers by management to their immediate families (which may be
desirable for tax planning reasons) or transfers between different funds managed by the
private equity provider.
Newco's articles will also contain good leaver/bad leaver provisions. The implications of being
a good or bad leaver depend on the deal agreed between the private equity provider and
management, but, broadly, a good leaver may be entitled to keep all or part of his
shareholding in Newco (although on larger buy-outs it would be rare for a manager to be
able to keep any of his shareholding) and, to the extent that any shares have to be sold, he
may sell them at the higher of the price he paid for the shares and their fair value at the
date of departure. A bad leaver, by contrast, can usually be required to sell all of his
shareholding and to do so at the lower of the price he paid for the shares and their fair value
as at the date of departure.
Service agreements
Management will be employees of Newco and will have service contracts to reflect this.
These will usually be in a fairly standard form with the usual range of contentious issues. For
example, should management be capable of being placed on garden leave, are there to be
restrictive covenants and is any bonus scheme contractual or discretionary?

Acquisition
The acquisition of the Target by Newco 2 is either a share or business purchase, the principal
documents of which include:

a share purchase or asset purchase agreement;

a tax deed (not on an SBO or business purchase);

trademark or trade name licences;

pension documents dealing with any transfer of employees' pension funds;

property documents dealing with the transfer of any leasehold or freehold property;

documents dealing with any transitional arrangements relating to the handover of

services performed by the seller's head office, if relevant;

a disclosure letter; and

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novations or assignments of contract (on a business purchase only).

Finance
In addition to the equity finance, buy-outs will require debt funding, the details of which will
be set out in the following agreements:
Bank facility agreement
This agreement specifies the amount of money being advanced to Newco 2. It will specify the
purposes for which the money can be used, the circumstances in which it must be repaid
immediately, the circumstances in which it can be repaid early at Newco 2's option (if at all),
and it will also set out the various covenant tests which Newco 2 must satisfy at all times
which indicate to the bank whether or not Newco 2 is financially healthy.
Bank security documents
This is a package of documents which grants the bank security over the Target's assets. The
usual security package involves Newco 2 giving a debenture in favour of the bank to secure
its borrowings, with Newco, the Target and each of its subsidiaries guaranteeing Newco 2's
borrowings. These guarantees are then usually secured by debentures given by each of those
companies.
Inter-creditor agreement
This is the agreement between Newco, Newco 2, the banks and the holders of any loan notes
in Newco (or any subsidiary of Newco) by which they agree the order of priority for the
payment of money by Newco 2 and the control of any insolvency process to recover money
from the Newco group. The agreement is entered into because the bank will want to make
sure that it has priority over, for example, mezzanine finance, second lien finance and/or
loan note holders in the Newco group and can control any insolvency process of the Newco
group.
The inter-creditor agreement will specify those situations in which Newco and Newco 2 are
permitted to repay mezzanine finance, second lien finance and/or loan notes without the
need to obtain the bank's consent. Usually, the bank will not want any money to be
extracted from Newco or Newco 2 for as long as the bank debt is outstanding. The
mezzanine lender, second lien lender (if any) and the holders of the loan notes in the Newco
group will aim to obtain the bank's consent in the inter-creditor agreement to money being
repaid to the mezzanine lender and the loan note holders when there is sufficient cash
available in the Newco group to allow it to honour bank loan repayments and to meet the
Newco group's cash requirements for a specified period of time.

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Private Equity Transactions: Overview of a Buy-out

7.

Exits

A private equity provider's return on in a smaller buy-out may be a mixture of current yield
and capital gain, although on larger buy-outs is usually capital gain achieved at exit. A
private equity provider will typically look to realise any capital gain within three to seven
years from the date of the investment. The usual exit for an investor from a successful
Target is one of:

a listing on a recognised stock exchange;

a sale of Newco to a trade purchaser; or

an SBO.

For an unsuccessful Target, the exit tends to be by way of one of the following:

the insolvency and winding-up of Newco;

the sale of the investor's shareholdings to management or to Newco on a purchase of

own shares, often for a low price; or

a restructuring and transfer of equity to the bank(s) or mezzanine lenders who then
try to sell the business.

Inevitably, across a portfolio of investments held by a private equity provider, some

investments will do well and others will not, but many portfolios will contain investments
from which there is no real exit other than a purchase of shares by Newco or Newco's
management. Many portfolios will contain an unsuccessful investment.
Many private equity providers undertake buy-outs with a view to adding on other businesses
in the same sector in order to create a larger enterprise which benefits from economies of
scale. This "buy and build" strategy presents the opportunity to make a combined enterprise
which is worth significantly more than the sum of the individual components and the private
equity investors can have longer exit profiles on these types of investment.

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Appendix 1
About this briefing
This briefing forms part of a series of briefings written about corporate issues by Ashurst for
international investors. The briefings in this series are:
No. 1

Establishing a Business in the United Kingdom

No. 2

Acquisition of Private Companies in England and Wales

No. 3

Acquisition of a Business in England and Wales

No. 4

Why List in London?

No. 5

Takeovers - A Guide to the Legal and Regulatory Aspects of Public Takeovers in the
United Kingdom

No. 6

Joint Ventures in England and Wales

No. 7

A Brief Guide to AIM

No. 8

A Brief Guide to Corporate Insolvency in England and Wales

No. 9

Private Equity Transactions: Overview of a Buy-out

If you would like further information on the matters referred to in this guide or to receive
additional copies of this or any other briefing in the series, please speak to your usual
contact at Ashurst or one of our partners listed below:
Simon Beddow
T: +44 (0)20 7859 1937
E: simon.beddow@ashurst.com

David Carter
T: +44 (0)20 7859 1012
E: david.carter@ashurst.com

Karan Dinamani
T: +44 (0)20 7859 1130
E: karan.dinamani@ashurst.com

Bruce Hanton
T: +44 (0)20 7859 1738
E: bruce.hanton@ashurst.com

Stephen Lloyd
T: +44 (0)20 7859 1313
E: stephen.lloyd@ashurst.com

Nick Rainsford
T: +44 (0)20 7859 2914
E: nick.rainsford@ashurst.com

Mark Sperotto
T: +44 (0)20 7859 1950
E: mark.sperotto@ashurst.com

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