LegalLingo: The characteristics of buyout funds

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts. This can result in a wall of jargon, which students and trainees often find difficult to understand. We’ve therefore introduced LegalLingo to break down these concepts into bite-size explanations to make the industry more accessible for aspiring trainees.

Latest in the series is an explanation of what characteristics you can expect to see in investments made by private equity buyout funds:

• The fund’s participation in the target is anticipated to be a four-to-six-year investment horizon, in order to realise a profit for investors. This contrasts with corporate M&A where the buyer may well expect to own the target in perpetuity.
• Private equity funds seek out competent management teams to manage the company day-to-day under the guiding hand of the fund’s overarching growth strategy.
• This management team is incentivised by receiving equity in the target company, pro rata to a personal investment on the same terms that the fund invests on (“strip equity”) and/or via shares purchased at a low initial cost that have the potential for significant upside (“sweet equity”), allowing managers to directly benefit from any increase in the company’s value.
• The target business is acquired via a mixture of the funds received from fund investors and debt finance, known as leveraged finance. On a successful investment, the leveraged finance will enhance returns for investors.

If you found this helpful, why not check out the other LegalLingo posts on our website? We’ll be adding to it regularly so keep an eye out for them.