Dealology – Equity Rollovers in Private Equity Deals

Equity rollovers are seen in approximately 80% of all private equity deals. With equity rollovers, certain sellers – mostly founders and management, but sometimes institutional sellers – are offered the opportunity or required to contribute a portion of their equity stake in the target for a stake in the new equity capital structure of the go-forward company. This allows sellers to both cash out a portion of their stake in the target at closing and participate in future upside when the PE sponsor exits the investment. It also provides the private equity sponsor an opportunity to offer an increased enterprise value for the target without increasing the size of the required equity check, while aligning and incentivizing management to run the business as owners. This installment of Dealology covers:

  • What equity rollovers are
  • Why we use them
  • Key terms ripe for negotiation, including:
    • The type of security the rollover participants roll into
    • Governance control and other rights
    • Related party transactions, including management fees
    • Buyback rights upon departure of rollover management