Private equity firms have a growing interest in minority investments that target larger companies, according to a Law360 article.
Given the increased competition for assets resulting from a declining number of proprietary deals and an increasing number of auctions, private equity firms are looking to deploy capital in a wider variety of ways, including minority investments.
These minority investments are often viewed as the first step towards eventually obtaining a controlling stake or acquiring the company outright.
Minority Investments: Key Considerations
One advantage for private equity firms when competing for minority investments is their the ability to offer growth capital or assist with recapitalization, which can be attractive to owners who want to keep control of their company but prefer financial backers who have a vested interest in growing their business.
When pursuing a minority investment, private equity firms and their counsel need to be aware of the numerous differences with respect to the key issues that need to be negotiated, including liquidity, indemnification, and control.
Regarding liquidity, private equity firms need to focus on registration, drag-along and tag-along rights, and otherwise minimize the restrictions on transfer. The exit plan, whether a sale, the capital markets or otherwise, needs to be clear because it can be difficult to find buyers for noncontrolling stakes in the secondary market.
With respect to indemnification, it’s important to understand the differences in what’s market for a minority investment vs. a controlling investment or acquisition as well as the circumstances under which indemnification is need from the company itself or the pre-investment stockholders.
Lastly, with regard to the issue of control, minority investors need to be aware that the controlling stakeholders, especially in family-controlled businesses, will resist ceding too much control over the company, which can create complicated dynamics.
Minority investors should negotiate for some amount of control over the company, including the appointment of directors and approval rights in other contexts to the extent possible.
