Previous installments of Billboard Insider’s private equity and out of home series have discussed why to raise private equity, what to look for in a partner and how to value your shares. Today Craig Berry of Stark Capital Solutions discusses private equity terms and conditions.
Stark Capital has participated in and followed private equity in the OOH Industry for over two-decades.
From time to time, we are asked to invest equity in combination with the debt financing we provide. In fact, we recently closed on two private equity investments with experienced operators. Although Stark Capital doesn’t have an interest in independently owning/managing billboard assets ourselves, we are interested in deploying capital to help facilitate growth for experienced operators. Investing equity has been a natural extension to Stark Capital’s established debt-capital capabilities.
Equity investments are used for a variety of purposes and are structured in many different ways. However, this article piggyback’s off Billboard Insider’s previous articles assuming an equity investor purchases direct ownership of an existing company.
The intent of this article is to outline regularly used terms and conditions often seen when negotiating a private equity transaction.
Common Terms and Conditions:
Investment Objective – Clearly outlines the purpose of the equity transaction (i.e. complete a sizeable acquisition, buy-out existing partner(s), provide working capital to hire more employees, paydown debt, etc.).
Sources & Uses – Identifies where the capital is coming from and what the capital will be used for.
Ownership – Distinguishes the ownership % post equity investment.
Term – An agreed upon timeframe associated with the investment. Most private equity investors have a “hold” period of 3-5 years.
Preferred Return – Many investments include a preferred return to the investor. This is a minimum rate of return granted to the investor as in incentive for investing into the company. The preferred return compounds annually throughout the term of the investment, and is paid out before other profits are distributed to common shareholders. A preferred return is also referred to as a hurdle rate. The preferred return percentage is up for negotiation and can differ based off the investment’s perceived risk. This % can vary widely – often between 8%-15%.
Right of First Refusal – An equity investor typically has the first option to contribute additional capital into the company.
Supermajority – Requires a larger percentage of voting members to approve important decisions in the company. This protects an operator ensuring they have a say in important decisions even if they give up more than 50% ownership to the equity investor.
Management Fees – Compensation paid to the investor for their role in overseeing the management of the company. Management fees are commonly a % of revenue or EBITDA and paid monthly or quarterly.
Unused Capital Commitment Fee – Compensation due to the investor in exchange for committing funds not yet invested into the company. This fee is typically a small percentage of the total commitment and paid at the initial closing.
Put-Rights – An option to sell your shares back to the company.
Tag-Along-Rights – An option for the minority shareholders to sell their ownership in the event a majority shareholder is selling their ownership.
Waterfall Distribution – Identifies how the proceeds from a sale, or profits of a company are paid out. The split of proceeds between the company shareholders can be negotiated; however, it commonly equates to the percentage of ownership a shareholder owns of the company. A typical waterfall distribution is as follows:
Paid 1st: Re-payment of all company debt & obligations
Paid 2nd: Payment to the preferred return private equity investors
Paid 3rd: Split between company shareholders
Equity Sponsor – A company who is responsible for raising, deploying, and managing investor capital in equity investments. Also referred to as a financial sponsor, they typically have another layer of negotiated terms with their investors – such as a lower preferred return and a waterfall distribution that includes a portion of the proceeds compensating the equity sponsor (often referred to as a ‘carried interest’).
Tomorrow’s article will share tips for independent operators when negotiating and structuring equity transactions.
Questions about private equity terms? Contact cberry@starkcapitalsolutions, 260-433-5833.
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