Sponsors seek relief outside of MAE clauses to break deals, GPs ask LPs for more ability to use fund-level leverage, Consortium to buy minority stake in Trustly

GPs explore strategies to break deals in the pandemic downturn and Spectrum Equity invests in CINC Systems.

Morning Hubsters!

Check this out: GPs are exploring different strategies outside of invoking material adverse effect clauses to break deal agreements in the pandemic downturn.

Successfully enacting an MAE seems like a Herculean exercise. What has happened so far is that the MAE (or material adverse change) is threatened as a pressure point to force renegotiations of price or even, ultimately, capitulation by the seller who is not interested in going to the mats with all the associated costs.

All eyes are on Advent International and Forescout Technologies, which are heading to Delaware Chancery Court to battle out MAE over their investment that was agreed in February, writes Sarah Pringle on PE Hub this morning.

Advent/Forescout is the first case actually heading to trial, which is set for mid-July.

Similar to some other situations, the MAE clause in the Advent-Forescout suit explicitly excluded ‘pandemic’, meaning a buyer cannot cite pandemic as a trigger for an MAE. MAE clauses typically have a long list of what does not constitute an MAE.

At the core of Advent’s argument was the disproportionate financial impact that the company suffered in relation to its peers. Advent also is still claiming the deal is busted because of covid-19’s impact.

“I’m surprised that there are people that have negotiated covid into the MAE, taken the risk, and are still willing to plea covid,” Margolin said. “That to me is really bold and pretty incredible, but as you pair it with other claims, it’s a good flavor for the complaint.”

Instead of MAE, some buyers are relying on an argument that changes in the pandemic have led to a breach of the ordinary course covenant between signing of the deal and close, Sarah writes.

“What happens when you’re a company that had 1000 retail stores and now you’re all the sudden down to 250 [stores]?” added Margolin. “Maybe the MAE won’t allow you to point to covid. But maybe you have the argument that you’re no longer conducting business in the ordinary course.”

The ordinary course covenant is potentially easier to prove, but there are challenges, Wofford said.

“How do you operate ‘in ordinary course’ in the context of a pandemic?” Wofford said.

Read Sarah’s story here on PE Hub.

Top Scoops
GPs have used various ways to inject more capital into existing investments that need help getting through the downturn. One way they’re doing that is by using fund-level credit to create a pool of capital existing portfolio companies can use to support operations or find attractive investments in the downturn. Most GPs have some ability to use fund-level credit, but managers are asking for amendments to fund contracts for more flexibility around using such debt, I write today on Buyouts.

Most LPs are happy to grant such requests as long as they understand the motivation behind the moves and their alignment with the GP is not impacted. Though some investors are more wary of imposing “leverage on leverage” and the risks associated with that, sources told me. Read it here on Buyouts.

Spectrum Equity made a growth investment in CINC Systems, a software provider for the community association industry. Spectrum is CINC’s first institutional investor. Read our news brief here on PE Hub.

Have a great Thursday! Hit me up as always with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com, on Twitter or find me on LinkedIn.

Last call (!) for our compensation survey: Calling all CFOs, directors of human resources and managing partners! Please take part in our 10th annual Holt MM&K Buyouts PE/VC compensation survey. All participants receive an executive summary of the final survey and a steep discount on the full report. All responses are kept confidential. Tuesday, June 30th is the last day to submit, so click here for the survey or request an e-mail copy from Matt Cutler at matthew.c@peimedia.com