Minority Investments in Private Equity: An Alternative Strategy?
On 17 November 2016, Thomas Schulz, the head of Noerr London, participated in a panel at the IBA’s Private Equity Transactions Symposium 2016 along with Steven Cohen (Wachtell Lipton Rosen & Katz), Chris Hale (Travers Smith) and Christian Hoedl (Uria Menendez). The panel explored the added value that lawyers can bring by helping to put together the structure of a deal, marrying commercial, tax, regulatory and legal constraints. A particular focus was on the growing trend for longer fund lives, and ways to roll over investments and keep management incentivised by way of virtual exits. The panel also discussed the use of hybrid instruments in PE transactions.
Thomas Schulz spoke about minority investments by financial sponsors as an alternative strategy. Most funds clearly have a majority strategy in line with their fund raising narrative in order to bring transformational change to their investee companies. However, a growing number of funds now specialise in minorities or are allowed more flexibility in their fund documents; hence there is a small but increasing number of minority investments by financial sponsors. Interestingly, a study has shown that on a risk adjusted basis, minorities have a higher return than majorities [Puche/Lotz, PE Minority Investments, The Journal of Private Equity, Fall 2015, p 46]. Using greater flexibility on structure opens more possibilities to gain access to growth and high quality assets outside auctions. Step-in rights for the minority (in the event of financial deterioration) and well-designed exit strategies are necessary; these are challenges which can be overcome via a proper structure.