The Private Equity Toolkit

9Deal Structuring

Key Topics in Chapter 9:

• Capital structure considerations: what type of leverage to use and when it is too much
• Management Incentive Plans: target A, reward A and achieve A
• Enhance your deal through earn-outs, earn-ins, escrows and vendor loan notes
• Minority deals: negotiate robust exit rights or be held hostage by majority owners
• Advanced deal structuring techniques for minority investments

What is deal structuring, exactly? There are quite a few topics that fall within this realm, ranging from financing and governance considerations to the legal and tax aspects of a deal. This chapter will focus on what I regard as the three most crucial areas of deal structuring: the capital structure, the management incentive plan and the key deal structuring features that private equity sponsors might choose to employ in order to improve the risk and reward characteristics of a deal. Unlike valuation, the topic of structuring a private equity investment is scarcely covered elsewhere: while there is some information available about typical debt structures and management incentive plans, there is very little written about more advanced deal features, such as those involving performance-based value sharing or hybrid equity financing. This clear gap in the investment literature gives me an opportunity to say a few things about a variety of deal structuring tools that, in my experience, can help investors maximize returns, overcome entry valuation gaps, amplify upside ...