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Private Equity Transactions:

Overview of a Buy-outInternational Investor Series No. 9

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Private Equity Transactions: Overview of

a Buy-outInternational Investor Series No. 9

Contents

1. Introduction 1 2. Buy-outs 2 3. Parties 4 4. Financing a buy-out 6 5. Process 8 6. Documents 12 7. Exits 15

Appendix

Appendix 1 About this briefing 17

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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more informationplease contact us at Ashurst LLP, Broadwalk House, 5 Appold Street, London EC2A 2HA T: +44 (0)20 7638 1111F: +44 (0)20 7638 1112 www.ashurst.com

Ashurst LLP and its affiliates operate under the name Ashurst. Ashurst LLP is a limited liability partnership registered in England and Wales undernumber OC330252. It is a law firm authorised and regulated by the Solicitors Regulation Authority of England and Wales under number 468653. Theterm "partner" is used to refer to a member of Ashurst LLP or to an employee or consultant with equivalent standing and qualifications or to anindividual with equivalent status in one of Ashurst LLP's affiliates. Further details about Ashurst can be found at www.ashurst.com.

© Ashurst LLP 2011 Ref: 9008033 November 2011

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Private Equity Transactions: Overview of a Buy-out

Page 1

1. Introduction

Private equity transactions cover a variety of arrangements that have one common feature:the source of money that is funding the transaction. This source is usually a fund establishedto invest specifically in unquoted securities (private equity) rather than in publicly quoted

securities or government bonds although increasingly hedge funds are becoming active inthe sector. Such investment and financing usually involves the provision of some form of

debt finance and of other capital bearing an equity-type risk profile, which is medium to longterm in nature. The investment is invariably targeted at businesses with growth potential,with the ultimate aim being to realise that potential through a sale to a third party or a

flotation on the public markets.

Private equity transactions include the provision of funding for businesses starting from

scratch (start-ups), the injection of funding into existing businesses to help them expand(development capital) and the funding of purchases of businesses by management teams(buy-outs).

This briefing focuses on buy-outs and looks at:

• the different types of buy-out;

• the parties involved;

• the sources of finance used to fund a buy-out;

• the process by which the transaction takes place;

• the documents required; and

• the exit process for investors.

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2. Buy-outs

Buy-outs tend to be the well known private equity deals. They generally present a lower riskthan a start-up or a development capital investment, and the competition between privateequity providers has led to the development of the auction process whereby a seller invites

several private equity houses to bid against one another to acquire a business.

A buy-out is the process whereby a management team, which may be the existing team orone assembled specifically for the purpose of the buy-out, acquires a business (the Target)from the Target's current owners with the help of equity finance from a private equity

provider and debt finance from financial institutions. To achieve this, a group of newcompanies will be established; at its most simple, this will usually consist of a top company,owned by the private equity provider and management (Newco), which will act as the

investment vehicle for the investor, and a wholly-owned subsidiary of Newco (Newco 2),which will act as the purchasing and bank debt vehicle. Buy-outs tend to fall into one of thefollowing categories:

Management buy-out (MBO)

An incumbent management team buys the business it manages. These were traditionally

instigated by management approaching the Target's owners with a proposal to acquire thebusiness and then take the deal to the funding institutions. This may happen wheremanagement are running a division of a larger group of companies and feel that they are not

receiving the support or investment that they require to enable them to achieve theirbusiness goals. This management led approach is still relatively common on smaller MBOs(typically those for less than £50 million consideration) although they are now comparatively

rare with most buy-outs being initiated by the owners.

Where management do initiate the buy-out process, they must be very careful to ensure that

they do not breach any duties of confidentiality which they owe to their employers (forexample, by disclosing financial information or trade secrets to potential funders). Theyshould also be wary of breaching their service contracts (for example, by failing to devote

their energies to the Target's business but, instead, spending their time trying to pursue abuy-out).

Management should seek appropriate legal advice as soon as possible and, where possible,obtain their employer's permission to pursue their objectives. The employer's permission

usually involves granting a waiver of any breach of management service contracts which

would otherwise occur. Clearly, the employer can remove this waiver at any time and requiremanagement to desist from pursuing the buy-out.

The other, and increasingly common, form of MBO is the secondary buy-out (SBO), where a

Target currently owned by a private equity provider and management is acquired by anotherprivate equity provider who backs the same management team. In SBOs, the managers are

both sellers and investors.

Management buy-in (MBI)

The trend on larger transactions has been for private equity providers actively to seek outdeals, partially in response to increased competition reflecting high availability of funds

within the industry.

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A team is assembled for the purpose of making the acquisition, where a business may have

the potential to achieve significant growth but the existing management team is eitheruninspiring or not interested in buying the business. Typically, an MBI involves private equityproviders and intermediaries identifying a group of individuals with the appropriate attributesto undertake an MBI and then matching them with, and transplanting them into, an

attractive target.

Buy-in/management buy-out (BIMBO)

This is a hybrid, combining an existing management team with an external managementteam. For example, the private equity provider may take the view that the management aremainly good but lack a key individual, for example a finance director.

Institutional buy-out (IBO)

This takes place where a private equity provider independently sets up Newco to acquire theTarget and gives the Target's management a small stake in the business either at the time of the buy-out or after its completion. The private equity provider may retain existing

management or perhaps bring in new management at a relatively late stage in thetransaction. This is now the most common form of buy-out on mid to large deals. Many may

also be secondary buy-outs (or further follow-on buy-outs known as tertiary, quarternaryetc).

Many of the components of all private equity transactions are the same. However, the size of

the private equity provider's proposed stake in the business will affect the approach that itwill take.

Buy-outs largely take place with the private equity fund, or a consortium of private equity

funds, taking a majority stake in Newco. Start-ups and development capital usually involvethe private equity fund taking a minority stake. Broadly, the private equity provider will takea more relaxed view about the controls that it requires if it holds a majority stake.

Where it takes a minority stake, the private equity provider will be much more concerned toensure that it has veto rights over what the business does, can protect its directors from

dismissal, can control the appointment of other directors to Newco's board and can force anexit from the business at some time in the future.

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3. Parties

A typical buy-out will involve the following participants:

The management team

The team tends to be confined to a small number of core managers until the buy-out hasbeen completed. On larger buy-outs this core team is often extended after completion to

bring in "second tier managers".

Management's lawyers

The role of management's lawyers is usually restricted to advising management on their

equity investment in Newco, their service contracts, any director-related issues that arise,together with ensuring that the contract for the acquisition of the Target is not unduly

onerous for management. On smaller management-led buy-outs, management's lawyersoften have a more significant role and may conduct the negotiations on behalf of Newco.

The private equity provider

The transaction will usually be run by one or two executives from the private equity provider

who will play a central role in negotiations relating to all elements of the deal.

The private equity provider's lawyers

Lawyers for the private equity provider will normally be heavily involved in all aspects of the

transaction. They will prepare and negotiate the documents relating to the equity element of the transaction with management's lawyers. They will also act as lawyers to the Newco groupon its acquisition of the Target from the seller (except on smaller buy-outs when this may be

done by management's lawyers). This will involve carrying out a due diligence investigationof the Target, negotiating the acquisition agreement with the seller's lawyers and negotiatingthe bank facility agreement(s) and bank security documents with the bank's lawyers.

The bank

The bank is responsible for providing the senior debt (and possibly second lien or mezzanine

debt (explained under Debt Finance below)). Senior debt is debt that is not subordinated toany other debt and is intended to rank ahead of other debt on the insolvency of Newco.

The bank's lawyers

Apart from drafting the banking documents, the bank's lawyers will also generally review the

due diligence reports produced by Newco's advisers, keep an eye on the acquisition

agreement and review the seller's disclosures against the warranties.

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Reporting accountants

The private equity provider will usually appoint a firm of accountants to produce a long form

report on the Target, to review management's business plan and to examine management'sfinancial projections.

In nearly all auction processes the seller will also have appointed a firm of accountants toproduce a long form vendor due diligence report (VDD) on the Target. The VDD will be

addressed to the successful bidder and Newco's banks.

Environmental auditors

The private equity provider will often ask environmental auditors to carry out anenvironmental risk assessment of the Target to assess whether processes carried on by it

comply with all relevant environmental laws and whether any contamination is occurring. Onan auction a report produced by the seller's environmental auditor may be produced to be

addressed to the successful bidder and Newco's banks.

Investment bankers

On the very largest buy-outs, a private equity provider will normally appoint a firm of

investment bankers to manage the transaction and to provide strategic advice on thenegotiation of the deal, both with the seller in relation to the sale process and with the banksin relation to the finance for the deal (particularly if a high yield bond is to be issued).

On start-ups and development capital transactions, the team is often much smaller,consisting of:

• management and its lawyers;

• the private equity provider and its lawyers; and

• management's accountants, who will be asked to advise on tax and structuring issues.

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4. Financing a buy-out

The acquisition of the Target by Newco 2 is usually financed from two main sources:

Equity finance

Funds established to invest in private equity transactions obtain their money from a varietyof sources, including institutions (such as pension funds, banks and insurance companies),

companies, individuals and government agencies.

The private equity provider will subscribe for ordinary shares in Newco and will require

management to do the same so that they have an incentive to make the business succeed,with the possibility of increasing their share on an exit. Such an increase is usually structured

by the use of a performance ratchet in Newco's articles of association which operates infavour of management.

Any further funds invested in Newco will usually be by way of preference shares, loan notes,loan stock or some form of discounted notes. Provided that the transaction is structured

correctly, loan notes are more tax efficient for the Newco group as it may get, if structuredcorrectly, some deduction against profits where any interest is payable on the loan notes on

an accruals basis across the term of the loan. Also, interest and capital repayments are lessdifficult to achieve than dividends and repayments of shares.

The equity share capital of Newco held by management is often referred to as "sweetequity", while the combination of equity share capital and loan notes in Newco held by theprivate equity provider is often called the "institutional strip". On some buy-outs and SBOs, a

wealthy manager may invest in both the sweet equity and the institutional strip, whichmeans that for the money in excess of the amount required to purchase his percentage of the sweet equity, he will be treated as if he were a member of the private equity provider's

investing syndicate.

If a manager acquires shares in connection with his employment which are subject to good

leaver/bad leaver provisions (see Articles of association below), the growth in value of thoseshares will, in certain circumstances, be subject to income tax and national insurance

contributions. Considerable time is spent ensuring that managers' shares are subject tocapital gains tax and not income tax and national insurance (see Articles of associationbelow).

Debt finance

Debt finance will usually form the largest part of the required funding in a buy-out. Theprincipal source of this debt is the senior debt which is usually provided by the bank. The

principal component of the senior debt will tend to be a secured term loan to finance theacquisition. The senior debt may also include a secured working capital facility.

Often, there is a secondary source of debt finance in buy-outs (junior debt). Junior debt,which is any debt that is not senior debt, will often be provided in the form of mezzaninefinance or second lien, so called because in terms of risk and reward, it lies somewhere

between equity capital (unsecured but with the potential to earn large rewards) and bankdebt (well secured but with lower returns and not carrying the chance of capital growth). In

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smaller deals, junior debt may be provided by other forms of subordinated funding such as

an investor loan or a seller's loan note.

Mezzanine funds are invested as debt carrying a higher rate of interest than the senior debt,usually 3 to 4 per cent. over the bank's base rate, because the mezzanine security will rank

behind the senior debt security. In addition to carrying interest, the mezzanine finance mayalso be granted rights to subscribe for equity share capital in Newco (warrants), which is

often known as an "equity kicker". The provider of the mezzanine finance will only exercisethe warrants (and subscribe a relatively low amount of cash for share capital) if a sale orlisting of Newco is imminent, on which the mezzanine funder will make a large capital gain. If

the investment is unsuccessful, the warrants are never exercised, so the provider of themezzanine finance is not risking any money in taking the warrants, but there is the

opportunity for a substantial windfall.

A high yield bond or securitisation may be put in place after completion on larger buy-outs,to replace bank debt with cheaper financing. It is usually the mezzanine finance which isreplaced by the high yield bond or securitisation. The senior and mezzanine debt is normally

provided to Newco 2 in order to structurally subordinate the debt.

Priority

The typical order of priority of investments in the Newco group on a return of capital is asfollows:

• the senior debt provided by the bank is paid off first;

• the mezzanine finance or second lien finance (if any) is usually paid out next;

• any high yield bonds in issue are then repaid;

• the loan notes held by the private equity provider are then repaid (alternatively, if theprivate equity provider has opted for preference shares instead of loan notes, thesewill be redeemed); and

• any balance is then shared between the holders of the equity shares in Newco inaccordance with any order of priority set out in Newco's articles of association.

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5. Process

As mentioned already, the development of the buy-out market means that the traditionalMBO is no longer the standard. Increasingly, a large number of transactions are institution-led and involve an auction process carried out by the seller. However, although such deals

are more sophisticated, the traditional model serves as a useful example of the way a buy-out transaction will progress.

On smaller and mid-sized buy-outs, management may have a fairly significant role indetermining which private equity provider will fund the buy-out. On the larger buy-outs, it

tends to be the seller who chooses the private equity provider. On very large buy-outs,management may not enter into any share incentive arrangements with the private equityprovider until after the deal has been completed.

A buy-out involves, in effect, three transactions:

Equity: This is the deal between the private equity provider and management relating totheir subscription for shares in, and management's employment by, Newco.

Acquisition: This is the deal between Newco 2 and the seller for the acquisition of theTarget.

Finance: These are the arrangements between Newco 2 and the providers of finance for theacquisition of the Target.

Business plan/information memorandum

Whatever the size of the transaction, the first step is for management to prepare a businessplan (or the seller to prepare an information memorandum in the case of larger buy-outs).

This will explain the Target's background, its financial record and its projected performancefollowing the injection of funds or buy-out. On smaller buy-outs it will usually be the businessplan that triggers the private equity provider's initial interest in the transaction. On larger

buy-outs and auction sales, the information memorandum is often prepared by aninvestment bank.

The private equity providers will often appoint reporting accountants to review this businessplan or information memorandum, although on some smaller transactions they tend to carry

out this review themselves. The review will challenge some of the assumptions on which the

business plan has been prepared. The private equity providers will also wish to recalculatesome of the figures used, on the assumption that different circumstances arise (for example,lower turnover and higher interest costs), in order to test the viability of the projections.Only if the business presents an attractive and credible investment opportunity will the

private equity provider take the transaction further.

In the larger auction processes, the information memorandum is designed to elicit indicationsof interest at a certain price at the early stages of the auction process.

Equity term sheet

Once the private equity provider has decided, in principle, to proceed, the next step is to

draw up a term sheet. On buy-outs, this will take the form of an offer letter entered into

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between the seller and Newco (as buyer). There may also be a term sheet between the

private equity provider and management setting out what interest management will have inNewco.

The offer letter or term sheet will often include an exclusivity provision which grants the

private equity provider an exclusivity period during which the seller or management agreenot to negotiate with anybody else in relation to the transaction. On larger buy-outs, the

private equity provider may try to insist upon an exclusivity period, to avoid incurring heavycosts before it knows for sure that it is not in a race with any other private equity provider orbuyer. Exclusivity is not normally available in the context of competitive auction processes.

Due diligence

Depending on the size of the transaction, the private equity provider will usually undertakesome form of due diligence. A large buy-out may involve the preparation of accountant's

reports on the Target's business, environmental reports on the Target's properties, insurancereports on the insurance cover maintained by the Target, actuarial reports on the funding of the Target's pension schemes and market reports on the macro-economic conditions in the

market in which the Target operates. The due diligence exercise helps to highlight areas of risk for a private equity provider so that it can more accurately assess the attractiveness of the opportunity. On smaller transactions, due diligence may be limited to particular areas

such as reviewing key contracts, checking the functionality of any important computersoftware and checking title to any material property. Some due diligence, particularly

financial, but increasingly legal and other areas, may have been carried out by the seller'sadvisers which, in due course, the buyer will be able to rely on. This is generally referred toas "Vendor Due Diligence" or "VDD".

Negotiations

When the due diligence exercise is completed the parties will negotiate the key legaldocuments. In competitive auctions, the seller will try to ensure the documentation is fully

negotiated and agreed during the due diligence period and, to the extent possible, whilstthere is still competition between bidders.

Exchange of contracts

The culmination of the preliminary stages of the buy-out process is exchange of contracts(referred to in many jurisdictions as "signing") in respect of all three elements of the deal.

On smaller transactions, exchange tends to take place simultaneously with completion(referred to in many jurisdictions as "closing"), but on larger transactions it is common tohave a split exchange and completion to enable any conditions precedent (sometimes called

"pre-closing conditions") to be satisfied.

Equity

The investment agreement will be signed and will be binding on the parties from exchange,although no money will be subscribed for shares until completion when all conditions of the

investment have been satisfied. This can create "chicken and egg" problems with the

acquisition agreement at completion because the subscription monies are needed to make

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the acquisition but the investment agreement will usually specify that it will not complete

unless the acquisition has been completed itself. In order to break this circle of conditionality, the investment agreement will often provide that the acquisition must havecompleted in all respects save for the payment of the purchase price, at which point theinvestment agreement will complete. The subscription monies can then be used to pay the

outstanding money due on the acquisition agreement, allowing the last component of theacquisition agreement to complete.

It is on exchange that the due diligence reports prepared by the Newco group's advisers andany VDD, including that of the reporting accountants, will be signed and dated and will

become effective. Management will also deliver their disclosure letter relating to thewarranties contained in the investment agreement.

Debt

The bank facility agreement will be signed and exchanged. The bank's obligation to provideits debt finance will be subject to certain limited conditions precedent, all of which must besatisfied prior to completion. Clearly, the private equity provider, management and the seller

will want to be confident that these conditions precedent can be satisfied at completion andwill be keen to resist conditions outside their control which give the bank rights to terminatethe funding arrangements. Sellers may insist in competitive auctions that there are no

conditions to the financing save for completion of the acquisition – so called "certain funds".

Acquisition

The agreement for the acquisition of the Target by Newco 2 will be signed and, subject tosatisfaction of the conditions (if any), will be binding on the parties from that date. Theagreement will contain warranties, which will be given as at the date of exchange and may

be repeated at completion. The other ancillary acquisition documents are usually agreed asagreed form documents when contracts are exchanged, but are not normally entered intountil completion.

Between exchange and completion

The next phase of the buy-out is the period between exchange and completion of the legaldocuments. A split exchange and completion may be required to allow the parties to obtain,

for example, regulatory approvals for the sale and purchase, such as EC Merger Regulationapproval or landlord's consent to the assignment of key leasehold properties.

Typically, if there must be a gap between exchange of contracts and completion to allowconditions to be addressed, the acquisition agreement will provide that their satisfaction is a

condition to completion. A seller will want to keep the number and subject matter of conditions to a minimum because the deal will usually become public on exchange of contracts and a failure to complete could be commercially damaging.

Completion

Where there has been a period of time between exchange of contracts and completion,

completion is usually a mechanical process triggered by the satisfaction of all outstanding

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conditions. At completion, the private equity provider and management will make their

equity subscriptions in Newco, intra-group loans will be made, the bank(s) will provide theirfinance and the acquisition of the Target will complete.

Post-completion

The final stage of the buy-out process is the period after completion during which relevant

statutory filings are made at the relevant registries, documents effecting a transfer of title toassets are stamped (if required), stamp duty land tax returns are filed (if relevant) and,

where necessary, changes in title to assets such as real and intellectual property are noted atthe relevant registry.

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6. Documents

Each of the three elements of a buy-out (equity, acquisition and finance) has its own set of documents. While the documents govern separate transactions between different parties,they all inter-relate to the extent that none will become unconditional unless all the others

do.

Equity

The main issues arising out of the equity deal on a buy-out include:

• the obligations of the private equity provider and management to subscribe for sharesand other forms of capital in the Newco group;

• the running of Newco and its subsidiaries;

• the relationship between the private equity provider and management; and

• the terms of employment of management.

These matters are dealt with in the following equity documents:

Investment agreement

The investment agreement (also known as the subscription and shareholders' agreement)

governs the relationship between management and the private equity provider. Part of thedocument deals with the mechanics of completion of the subscription of shares in Newco bythe private equity provider and management; these clauses will cease to be of concern

following completion of the investment. However, a large part of the document will continuein force to govern the relationship between management and the private equity provideruntil an exit is achieved and will contain the following key provisions:

• restrictions on what management can and cannot do with the Target's business

without the private equity provider's consent ("veto rights" or "negative covenants");

• rights for the private equity provider to appoint directors to Newco's management and

those of its subsidiaries;

• restrictive covenants which seek to prevent management from engaging in competingbusinesses or soliciting customers, suppliers or staff for a period of time followingcompletion of the investment and/or their ceasing to be an employee of, or a

shareholder in, Newco;

• restrictions on the ability of shareholders to transfer their shares freely to third parties.These will usually reflect identical provisions in Newco's articles of association;

• an obligation on all parties to abide by the provisions of Newco's articles of association;

• warranties to be given by management to the private equity provider. Managementusually warrant the reasonableness of their business plan and confirm certain factualinformation contained in due diligence reports. The private equity provider will rely on

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the warranties given by the seller in the acquisition agreement and will also ask

management to confirm that they are not aware of any breach of the warranties givenby the seller (unless it is an SBO where warranties from the selling private equityprovider are not normally given).

The purpose of the management warranties in the investment agreement is not primarily toseek a source of financial redress if the warranties are untrue, but more to promote

disclosure of information.

Articles of association

Newco's articles of association set out the rights attaching to its shares, including dividendentitlements, rights of shareholders on a return of capital and restrictions on the ability of

shareholders to transfer shares. Newco's articles are usually drafted to include pre-emptionrights so that no shareholder can transfer shares without those shares first being offered toexisting shareholders. The pre-emption rights are generally subject to certain permitted

transfers such as transfers by management to their immediate families (which may bedesirable for tax planning reasons) or transfers between different funds managed by theprivate equity provider.

Newco's articles will also contain good leaver/bad leaver provisions. The implications of beinga good or bad leaver depend on the deal agreed between the private equity provider and

management, but, broadly, a good leaver may be entitled to keep all or part of hisshareholding in Newco (although on larger buy-outs it would be rare for a manager to beable to keep any of his shareholding) and, to the extent that any shares have to be sold, he

may sell them at the higher of the price he paid for the shares and their fair value at thedate of departure. A bad leaver, by contrast, can usually be required to sell all of his

shareholding and to do so at the lower of the price he paid for the shares and their fair valueas at the date of departure.

Service agreements

Management will be employees of Newco and will have service contracts to reflect this.These will usually be in a fairly standard form with the usual range of contentious issues. For

example, should management be capable of being placed on garden leave, are there to berestrictive covenants and is any bonus scheme contractual or discretionary?

Acquisition

The acquisition of the Target by Newco 2 is either a share or business purchase, the principal

documents of which include:

• a share purchase or asset purchase agreement;

• a tax deed (not on an SBO or business purchase);

• trademark or trade name licences;

• pension documents dealing with any transfer of employees' pension funds;

• property documents dealing with the transfer of any leasehold or freehold property;

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• documents dealing with any transitional arrangements relating to the handover of

services performed by the seller's head office, if relevant;

• a disclosure letter; and

• novations or assignments of contract (on a business purchase only).

Finance

In addition to the equity finance, buy-outs will require debt funding, the details of which willbe set out in the following agreements:

Bank facility agreement

This agreement specifies the amount of money being advanced to Newco 2. It will specify thepurposes for which the money can be used, the circumstances in which it must be repaidimmediately, the circumstances in which it can be repaid early at Newco 2's option (if at all),

and it will also set out the various tests which Newco 2 must satisfy at all times whichindicate to the bank whether or not Newco 2 is financially healthy (the "covenants").

Bank security documents

This is a package of documents which grants the bank security over the Target's assets. Theusual security package involves Newco 2 giving a debenture in favour of the bank to secure

its borrowings, with Newco, the Target and each of its subsidiaries guaranteeing Newco 2'sborrowings. These guarantees are then usually secured by debentures given by each of those

companies.

Inter-creditor agreement

This is the agreement between Newco, Newco 2, the banks and the holders of any loan notesin Newco (or any subsidiary of Newco) by which they agree the order of priority for thepayment of money by Newco 2 and the control of any insolvency process to recover money

from the Newco group. The agreement is entered into because the bank will want to makesure that it has priority over, for example, mezzanine finance, second lien finance and/orloan note holders in the Newco group and can control any insolvency process of the Newco

group.

The inter-creditor agreement will specify those situations in which Newco and Newco 2 are

permitted to repay mezzanine finance, second lien finance and/or loan notes without theneed to obtain the bank's consent. Usually, the bank will not want any money to be

extracted from Newco or Newco 2 for as long as the bank debt is outstanding. Themezzanine lender, second lien lender (if any) and the holders of the loan notes in the Newcogroup will aim to obtain the bank's consent in the inter-creditor agreement to money being

repaid to the mezzanine lender and the loan note holders when there is sufficient cashavailable in the Newco group to allow it to honour bank loan repayments and to meet the

Newco group's cash requirements for a specified period of time.

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7. Exits

A private equity provider's return on in a smaller buy-out may be a mixture of current yieldand capital gain, although on larger buy-outs is usually capital gain achieved at exit. Aprivate equity provider will typically look to realise any capital gain within three to seven

years from the date of the investment. The usual exit for an investor from a successfulTarget is one of:

• a listing on a recognised stock exchange;

• a sale of Newco to a trade purchaser; or

• an SBO.

For an unsuccessful Target, the exit tends to be by way of one of the following:

• the insolvency and winding-up of Newco;

• the sale of the investor's shareholdings to management or to Newco on a purchase of

own shares, often for a low price; or

• a restructuring and transfer of equity to the bank(s) or mezzanine lenders who thentry to sell the business.

Inevitably, across a portfolio of investments held by a private equity provider, someinvestments will do well and others will not, but many portfolios will contain investments

from which there is no real exit other than a purchase of shares by Newco or Newco'smanagement. Many portfolios will contain an unsuccessful investment.

Many private equity providers undertake buy-outs with a view to adding on other businessesin the same sector in order to create a larger enterprise which benefits from economies of

scale. This "buy and build" strategy presents the opportunity to make a combined enterprisewhich is worth significantly more than the sum of the individual components and the privateequity investors can have longer exit profiles on these types of investment.

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Appendix 1 About this briefing

This briefing forms part of a series of briefings written about corporate issues by Ashurst forinternational investors. The briefings in this series are:

No. 1 Establishing a Business in the United Kingdom

No. 2 Acquisition of Private Companies in England and Wales

No. 3 Acquisition of a Business in England and Wales

No. 4 Why List in London?

No. 5 Takeovers - A Guide to the Legal and Regulatory Aspects of Public Takeovers in theUnited Kingdom

No. 6 Joint Ventures in England and Wales

No. 7 A Brief Guide to AIM

No. 8 A Brief Guide to Corporate Insolvency in England and Wales

No. 9 Private Equity Transactions: Overview of a Buy-out

If you would like further information on the matters referred to in this guide or to receive

additional copies of this or any other briefing in the series, please speak to your usualcontact at Ashurst or one of our partners listed below:

David CarterT: +44 (0)20 7859 1012

E: [email protected]

Charlie Geffen (Senior Partner)T: +44 (0)20 7859 1718

E: [email protected]

Bruce Hanton

T: +44 (0)20 7859 1738E: [email protected]

Stephen Lloyd

T: +44 (0)20 7859 1313E: [email protected]

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