Earnouts: It seems to be all about earnouts right now in the M&A world, whenever deals actually happen. Earnouts are a portion of the price of a sale only paid to the seller once the business achieves certain financial objectives. Earnouts help buyers through uncertainty and that defines our market right now.
Sarah Pringle over at PE Hub sat down with Eva Davis, co-chair of Winston & Strawn’s private equity practice, to talk about the deal environment. Davis spent time talking about the rise of earnouts in today’s environment. Check out the full piece here. Below is a sampler:
So how are deals in the works being restructured?
If [I’m a sponsor] and I had a letter of intent that I thought was a $200 million deal, and I thought I was putting $150 million of debt on that transaction and writing an equity check out of my fund for $50 million – what does that look like now? Is it still a $200 million deal or is it a $150 million deal with an earnout?
Literally every deal on my desk right now has an earnout component to it and did not have an earnout component two or three months ago.
We’ve been in a sellers’ market now for two, three, four, five years, I feel like, but certainly, the last year or two has been a sellers’ market. And if you came to a deal with an earnout, you as a potential bidder or buyer, you just weren’t competitive. The seller wanted to walk away with all cash, up front at closing. All the deal structures – whether it was around cash, no earnout, no seller paper, no indemnity, no escrows – everything was around maximizing cash to the seller at closing. And that’s what’s changed.
The few deals that are getting done are ones where sellers have recognized that dynamic has changed. And not all have. They’re living in a different world. But the world has changed on them, and so they’ve got to adjust where they are.
There are no market norms right now. The market’s out the window and you’re creating your own market real-time in terms of reps, warranties, structure and purchase price. And the main focus is on those earnouts.
Rescue: Yesterday we saw KKR agree to a large deal with publicly traded Coty Inc that will allow the company to delever its balance sheet. The deal is one of what are considered “rescue” opportunities private equity firms are expected to transact in the downturn. The optimum target for rescue are companies that were well-performing before the downturn, and that need some capital to bridge the loss of revenue in the lockdown until the world re-opens and customers come back.
This idea seems more likely for certain types of businesses, while others may never be coming back, even after re-opening.
Mario Giannini, CEO of Hamilton Lane, touted rescue opportunities as one of the rising opportunities for private equity. He spoke recently in front of the board of the Teachers’ Retirement System of Louisiana.
“There will be distressed debt plays, I would say they are probably not going to be as widespread as you saw in the 09-10 timeframe,” Giannini told Louisiana Teachers. “But I think the rescue capital will be far greater and have much better opportunities than you’ve seen in any other timeframe.”
A secondaries deal got done! Secondaries has mostly dried up in the downturn as buyers and sellers try to get a handle on asset valuations. However, StepStone Group bought a strip of assets out of the 2013 debut fund from Israel GP Qumra Capital for about $80 million. The deal moved the assets into a newly created vehicle, where they will continue to be managed by Qumra.
The firms were able to close the deal while working from home, Managing Partner Erez Shachar said. Read it here on Buyouts.
Spectrum Equity led a $144 million growth deal in DispatchTrack, a software-as-a-service platform for merchants and delivery service providers. DispatchTrack was formed in 2010 by Satish Natarajan and Shailu Satish, a husband and wife team. Spectrum Managing Director Vic Parker and Vice President Adam Gassin will join DispatchTrack’s board. Read the news brief here on PE Hub.
That’s it! Have a great day! Hit me up as always with tips n’ gossip, feedback or just to chat at firstname.lastname@example.org, on Twitter or find me on LinkedIn.
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Emerging managers and covid-19 – survey
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LPs, how actively are you backing spin-out groups and other emerging managers? How do you make commitment decisions? What terms do you negotiate?
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