Deal structure for PE backed deals

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by a searcher from California State University, Northridge
in Austin, TX, USA

3yrs ago

Deal structure for PE backed deals

I am targeting lower mid-market businesses withredactedM in EBITDA. I have built good relationships with a few smaller PE funds. Although I will put my money into the transaction, I would like one (or more) of these funds to bring most of the capital (assuming seller financing is unavailable). I'd greatly appreciate any pointers on common deal structures for such arrangements. I was part of one PE-backed transaction, but I don't want to generalize based on a single event.

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reply by a searcher 3yrs ago
from State University of New York (SUNY) in Buffalo, NY, USA

It’s hard to say what to expect. Will you run the business post close? What’s your pedigree? What % of the equity injection do you plan to contribute?

Most PE funds aren’t familiar with the searchfund model, so I wouldn’t expect economics like that of the traditional search (25% promote). If you have a good operating background, I’d expect an option package equal to 7-10% of the equity, lower if less pedigree. Your capital should be treated the same as the GPs, which may let you avoid paying the GPs promote (typically 20% of the upside after LP capital and pref is paid back). You may be able to get a piece of the promote if you bring a strong deal.

I think a lot of PE guys balk at searchfund type deals where the operator expects 25% promote. In their mind they are bringing all of the capital and bearing all of the risk, so why should they have to share so much upside with the operator. Any upside they give you comes out of their pocket so it would have to be an absolute slam dunk of a deal.

reply by a searcher 3yrs ago
from Harvard University in San Juan, Puerto Rico

Check independent sponsor terms to get an idea of ranges