Private Equity Club Deals: Equity Syndication
In our previous post, we discussed some of the customary agreements and covenants in interim investor agreements for private equity consortia. Today, we’ll describe the types of pre-closing equity syndication procedures commonly found in interim investor agreements. For large buyouts requiring significant capital investment, the initial members of a private equity consortium may want to be able to seek out other private equity investors in order to diversify some of their risk. An interim investor agreement often details how members of the private equity consortium may use the period between signing the share or asset purchase agreement and closing the transaction to solicit other investors.
The interim investment agreement sets forth the equity investment of each of the private equity funds and their corresponding ownership percentages in Newco. This section of the agreement also outlines a mechanism for adjusting equity commitments, typically done on a pro rata basis, to prepare for possible changes in the purchase price of the transaction or the availability or cost of debt financing.
Equity Syndication
Depending on the number of private equity firms initially involved in the consortium, the interim investor agreement may want to detail an equity syndication procedure. Although the private equity firms covenant to coordinate an equity syndication strategy, they each may also be given limited rights to syndicate on their own.
Some of the syndication rights that may be granted to the consortium’s members include:
Direct Equity Syndication
The private equity firms may be entitled to directly syndicate a specified portion of their equity investment in Newco without the consent of the other investors. The syndicating investor may possess “drag-along rights” enabling it to compel the non-syndicating investors to sell their respective ownership interests in Newco to the new investor on a pro rata basis. The non-syndicating investors may be granted corresponding “tag-along rights” permitting them to participate in any sale of ownership interests in Newco on a pro rata basis with the syndicating investor. Each new investor is required to become a party to the interim investor agreement and execute an equity commitment letter on the same terms as the initial investors.
“Silent” Equity Syndication
Each private equity fund may also be entitled to what are called “silent” equity syndication rights. In a silent equity syndication, a private equity firm syndicates economic or beneficial interests in an entity entirely controlled by or affiliated with the firm. This provision allows each of the sponsors to syndicate equity interests in the private equity funds investing in Newco rather than ownership interests in Newco itself. In other words, silent equity syndicatees purchase an ownership interest at the shareholder level. Since silent syndicatees are indirect owners of Newco, the interim agreement explicitly denies them governance, liquidation, or other rights to be offered to the direct owners of Newco in the definitive shareholders agreement.
The right of consortium members to syndicate their direct equity interests in Newco is usually subject to an anti-dilution provision requiring them to maintain a minimum percentage ownership interest or dollar amount invested in Newco.
Related Post: Private Equity Club Deals: Pre-Closing Investor Agreements and Covenants
