We have seen an uptick in the interest of private equity sponsors “teaming up” with strategics for transactions. This comes up in a number of contexts, including: (1) the sponsor and strategic teaming up on a greenfield project, (2) a strategic selling a stake (usually a minority interest but sometimes control) in an existing business to a sponsor with the strategic retaining an interest, and (3) a strategic selling a sponsor its entire stake in an existing joint venture with another strategic (so the sponsor effectively “teams up” with the remaining strategic). Here are five key learnings from the recent deals in which we have been involved:
(1) Ensure there is a meeting of the minds on key terms and the purpose for the venture. It goes without saying that the transaction should only take place if both parties know what they want from the venture and believe they can work together. However, when a sponsor and strategic team up, this is especially important given their usually different ultimate objectives (largely stemming from the sponsor needing liquidity down the road).
(2) Identify key issues or areas of conflict early in the process. This is connected to the first learning. It is incumbent on both parties to not only focus on areas of agreement, but also where the parties may disagree. There could be a number of areas – in the business plan, plans for capital contributions and distributions, non-competes, and so on. Identify them early and work productively to resolve them openly.
(3) Be aware of differences in experiences. We have worked on deals between sponsors and strategics of different countries where there were significant cultural differences to navigate. Other times, we have witnessed how different historical experiences can affect a deal. For example, each of the sponsor and the strategic may be doing their first deal alongside (as opposed to opposite) the other. Navigating those differences effectively will go a long way towards the success of the venture.
(4) Calibrate your expectations based on the level of your investment. While relevant for all deals, it is especially important in deals with strategies. In most transactions that sponsors undertake with strategics, the sponsor is a minority owner or a 50/50 partner with the strategic, as opposed to the controlling party. While there are exceptions, this is more the norm. Being a minority owner or, at most, a 50/50 partner affects what the sponsor needs to protect its investment but also what can be expected from the strategic.
(5) Ensure that governance and liquidity provisions meet your objectives. Without a doubt, these two areas – governance and liquidity – tend to be the “hot buttons” in any negotiation on terms:
- Governance– Board composition is often resolved fairly promptly. If the sponsor is a minority shareholder, the veto rights it receives can be subject to a lot of discussion. The biggest points are often whether there are vetoes concerning the hiring and firing of senior executives and approval of, and changes relating to, the business plan. These items often give rise to “tension” with a strategic (especially if senior management in the venture comes from the strategic).
- Liquidity– The sponsor’s need for a certain exit is invariably the most heavily negotiated term. While a sponsor should have a drag-along or put right in every deal, in deals with strategics, the triggers for exercise of the relevant right and the terms of the right are often hotly debated. We have developed some creative structures to bridge the differences between sponsors and strategics in these cases, to balance the different interests of the parties.
As the saying goes, every deal is different, and what works in one deal won’t necessarily work in another. This is especially true in deals between sponsors and strategics, where being creative and showing a willingness to be flexible are often what is needed to get the deal done.