Sponsor Exits: Managing Private Company Sales
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-10-25
In the last edition of the Digest, we discussed the issues and alternatives faced by private equity sponsors when taking a portfolio company public. An IPO exit can be an attractive option for the appropriate portfolio company, but a private company sale at the right valuation is often more compelling because it provides certainty to a sponsor about the price that it will realize and maximizes the sponsor’s internal rate of return.
Although a private company sale may be an attractive exit, the traditional means of securing a selling sponsor’s post-closing indemnification obligations may decrease a sponsor’s IRR. This issue of the Digest discusses a number of strategies employed, and issues faced, by sponsors when they agree to indemnify buyers of their portfolio companies. These strategies include (i) preparing for a private company sale and sharing liability among other equityholders, (ii) utilizing alternative mechanisms to the traditional escrow account, such as representation and warranty insurance, fund guarantees and letters of credit and (iii) mitigating the risk of liabilities beyond those negotiated and assumed by the sponsor seller in the sale contract.