M&A: Challenges when the parties are private equities

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One of the most challenging M&A negotiations I had was when both the seller and buyer were private equities.

It should be noted that private equity funds are primarily focused on maximising returns for their investors and expediting the distribution of proceeds. Therefore, retaining a portion of the purchase price to satisfy potential liabilities after the sale of a portfolio company may affect the performance of a private equity fund.

Unlike the usual sellers, private equity sellers typically limit the warranties they provide to fundamental aspects such as their ownership of shares and capacity to enter into agreements. In one of the transactions I advised on, the private equity seller was only willing to provide the same warranties it received from the previous seller when the private equity seller first acquired the shares.

Private equity sellers seek to limit their obligations under sale and purchase agreements to those which they are sure will not give rise to liability. It is expected that exclusion and limitation of liability will be extensively negotiated where private equity parties are involved.

It is unusual for private equity sellers to agree to non-compete restrictive covenants. The principal business of private equity funds is to acquire and dispose of business, sometimes with a mandate from their investors to focus on certain sectors. Therefore, imposing limitations on their involvement in such businesses through sale and purchase agreements may pose challenges for private equity funds.

Any negotiation with private equity parties in M&A transactions should be viewed in the context as described above.

This post first appeared on LinkedIn on 20 July 2023.

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