How Minority Equity Tools Are Expanding Transaction Alternatives for Private Companies and Their Owners
Insight from Baird's Equity Private Capital Markets Team
The proliferation of structured equity and the expansion of investment mandates have led to a broader array of capital solutions being offered to private companies. Many transaction processes now involve fluidity never seen before. Majority, co-control, minority, structure and debt can all live harmoniously in a single process. Sometimes issuers seek this breadth out of the gate and other times the process evolves to include a broader swath of solutions. The result: Private companies can now choose from a large toolkit of bespoke financing products.
Not long ago, a process was either a sell-side or a minority capital raise. In today’s M&A market, several sell-sides have morphed into minority recaps, some structured, others pari passu equity. Many minority capital raises have evolved into a change of control. Now, some companies and sponsors are exploring both sides in a parallel process. Investors are happy to engage. They play to their strengths and either lean into a single approach or offer multiple proposals.
Furthermore, minority equity tools are enabling interesting outcomes, including (i) bridging valuation gaps and investor misalignment, (ii) minority valuations at a premium to control bids, (iii) structured equity without a valuation reference (non-dilutive equity), and (iv) majority investors borrowing minority tools to enhance their bids.
Below are some of the innovative structural tools being utilized, sometimes in isolation and sometimes in combination:
Structure
Description & Common Terms
Senior Equity / Liquidation Preference
Senior equity ensuring the new investor's money is returned first. Liquidation preference can be a simple 1x return of invested capital or something greater, structured through a non-cash dividend or a minimum multiple of invested capital (e.g., 1.5x), which can also step-up or step down over time
Waterfall
Distributions follow a waterfall amongst investor constituents, e.g., new investor first receives invested capital, then a preferred return, then other investor(s) share in the upside according to percentage split (and there can be multiple levels of sharing)
Floating Valuation
Valuation adjustment based on a future outcome, e.g., financial metric or investor return
Bespoke Upside Sharing
Earn-outs, warrants or other equity kickers for sellers or existing shareholders, typically providing value after new investor has achieved a targeted return
Non-Convertible Preferred Stock
Hybrid capital, which sits between debt and equity, provides downside protection through a fixed return, but no equity upside participation or valuation mark. Warrants may be employed to provide limited upside participation
Governance / Protective Provisions
New investor has consent rights over certain material corporate actions for protection and to ensure alignment, e.g., a sale of the company below a minimum multiple of invested capital
While these structures are powerful tools for bridging valuation gaps, aligning interests and providing alternatives, issuers and existing shareholders must understand and carefully navigate the associated economic implications.
The Baird Difference: Navigating Complexity and Delivering Innovation with a Unified Approach
As the line between traditional M&A and private capital markets continues to blur, a holistic advisor is essential to navigate investment structures and alternatives and provide actionable transaction solutions.
Baird's Equity Private Capital Markets Groupis uniquely positioned to guide clients through this shifting landscape. Working in close partnership with Baird’s M&A and industry bankers, we help clients understand when these structures are appropriate, how to negotiate them effectively and how to avoid their potential pitfalls. Our goal is to find the optimal solution that achieves our clients' strategic objectives, irrespective of the financial product. Connect with a member of our team to discuss.
Contacts:
Gavin Kolt Head of Equity Private Capital Markets +1-646-557-2337 gkolt@rwbaird.com
Guilherme Hubner Equity Private Capital Markets +1-646-557-2328 ghubner@rwbaird.com
