M&A and Private Equity Market Themes

Transcription

1 M&A and Private Equity Market Themes 218

2 Contents 2 Executive Summary 3 Survey Methodology 4 Deal Process Trends 5 Warranty & Indemnity Insurance Trends 14 Private Equity Trends 16

3 M&A and Private Equity Market Themes Executive Summary 3 We are pleased to present the 218 edition of our annual report on deal terms and trends in the M&A and private equity markets. Against a backdrop of continued political uncertainty, 217 proved to be a very busy year for mid-market M&A activity. That deal activity has been fuelled in no small part by the continued appetite of private equity investors and private equity backed businesses to deploy capital. Our survey findings confirm 217 to have very much been a sellers market, typified by sellers successfully securing low caps on their financial liability and, where relevant, some increasingly favourable economic terms on re-investment. This is partly borne out of the level of competition for assets but also by the availability of increasingly flexible warranty and indemnity insurance solutions for buyers. These insurance solutions are being considered in a majority of mid-market transactions. Even where cover is not ultimately taken out, it is driving buyers to accept that they might not simply be able to demand recourse from sellers. Whilst a sell-side bias would ordinarily lead to more auction processes, the proportion of deals surveyed this year which were actually executed after an auction process has fallen. Bilateral negotiations are more popular as buyers offer a higher price in return for the seller removing the asset from a competitive process. The higher prices have, in turn, pushed buyers in several deals to lower their risk profile with the introduction of MAC clauses and the repetition of warranties at closing. We hope that you find this report interesting and indeed that it might prompt some debate as to whether 218 will see a continuation of these deal trends or will the spectre of Brexit and increased political uncertainty move the strength of bargaining power back towards buyers as the year progresses?

4 Survey Methodology Pinsent Masons and Howden have collated data from 191 transactions advised on during 217. Of these 41% of the transactions were in the Advanced Manufacturing, Technology, Health, Business Services and Technology sectors (AMT), in Retail & Consumer and 17% in Real Estate. The remaining transactions occurred in the Energy, Financial Services and Infrastructure sectors. Transactions by sector Value of transactions by sector 41% 4% 4 17% 4% 9% 9% 25% 4% 8% 3% Advanced Manufacturing & Technology Energy Financial Services Infrastructure Real Estate Retail & Consumer The combined transaction value of the deals was 32 billion, of which transactions in AMT accounted for 4%, Retail & Consumer 25% and Real Estate. The average transaction size surveyed (excluding outliers) was 88 million with a median size of 25 million. In volume terms 8 of the 191 transactions reviewed had private equity involvement. Private equity transactions accounted for around 68% of the total transaction value (excluding outliers), with a higher average transaction value of 141 million. The median transaction size across the private equity deals was 8 million. Transaction type Transaction type (value) 42% 68% 32% 58% Private equity Trade

5 M&A and Private Equity Market Themes Deal Process Trends Across all transactions just were the subject of an auction process, though the figure was considerably higher for private equity transactions (31%) compared with trade deals (12%). 217 was a strong sellers market with significant money chasing relatively few quality opportunities. Our survey statistics indicate that buyers are trying hard to find, and succeeding with the execution of, off-market transactions. With limited resources private equity houses have to choose where to invest their time and certainty is highly valued, which perhaps goes some way to explaining this trend. Was the sale via an auction process? 1% 8% 6% 4% 21% 79% Buyout types 12% 88% 34% 66% All Trade Private equity Primary buyouts continued to outnumber secondary buyouts in our study with 73% primary compared to 27% secondary, an increase from our 216 survey results when the split was 6% to 4% respectively. This is to our mind a sign of a healthy market and suggests off-market deal origination with entrepreneurs is bearing fruit. 73% 27% Primary Secondary 5 The proportion of private individual sellers is consistent with last year representing 6% of transactions for which data was available. Seller type 18% 9% 5% Corporate This is to our mind a sign of a healthy market and suggests off-market deal origination with entrepreneurs is bearing fruit. 9% 59% Private Corporate & Private Institutional Private & Institutional

6 Split between exchange and completion Was there a split between exchange & completion? 6 In volume terms we found a third of all transactions included a split between exchange and completion, though this was more common in private equity transactions where a split was used in 44% of deals. In value terms, around 68% of the combined transaction value in the deals surveyed was subject to a split. Private equity Trade 56% 44% 72% 28% 4% 6% 8% 1% The higher the transaction value the more likely it is that a split between exchange and completion will be used. All transactions in our survey valued in excess of 1 billion utilised a split as did 86% of those transactions between 1 million and 5 million. Transactions of this size typically require a split for regulatory scrutiny/merger control so this is not that surprising. The proportion falls to just of transactions with a value of less than 1 million. Where there was a split exchange and completion and a repetition of warranties at completion, 6% of deals allowed for further disclosure. In the majority of transactions with further disclosure the buyer had the ability to pull out of the transaction if the further disclosure gave rise to a material deterioration in value of the target. In the 4% of deals where further disclosure was not allowed the buyer was not able to terminate but was effectively only taking risk from completion due to its ability to sue for breach of warranty in due course. Transactions involving a split between exchange & completion (by share of total transaction value) Split 32% Split 68% Proportion of transactions subject to a split 1% 8% 6% 4% 1% 86% 58% 21% Over 1bn Between 5m & 1bn Between 1m & 5m Below 1m Undisclosed

7 M&A and Private Equity Market Themes Increase in the use of MAC clauses Use of MAC clauses in transactions was fairly evenly split with just over half of transactions where they could have been applicable utilising them. There has been an increase in the use of MAC clauses compared to previous years. With the increase in uncertainty due to the ongoing Brexit negotiations and the higher prices that buyers are paying, buyers are being more demanding when it comes to the risk profile they are prepared to accept. This is reflected in the greater use of MAC clauses and the repetition of warranties at completion. Was there a MAC clause? We can see walk away rights being more keenly negotiated by buyers if volatility in the markets continues. 54.5% 45.5% Use of MAC clauses was equally prevalent in private equity and trade transactions. As would be expected given the range of transactions and industry sectors in our survey the details of MAC clauses varied, and while most specified a financial/valuation level of materiality, we saw several transactions with MAC clauses focusing on regulatory breach. In trade led transactions 53% permitted the buyer to walk away in the interim period due to material breach of contract. The figure was higher for private equity transactions (71%) where there was a split exchange and closing allowing for the buyer to walk away during the interim period. We can see walk away rights being more keenly negotiated by buyers if volatility in the markets continues and buyers become more nervous about the prices they are paying being less justifiable if there is a material correction. Could buyer walk away for breach of contract in the interim period? (trade) 1% 53% 37% Could buyer walk away for breach of contract in the interim period? (private equity) 71% 29% (subject to specified level of materiality) (unconditional) (subject to specified level of materiality) Was a second round of disclosure allowed? 7 59% 41%

8 8 Value leakage Almost all transactions employed either a locked-box mechanism or completion accounts. Trade deals were more likely to see the use of completion accounts with 84% of trade transactions employing them. The opposite is true in private equity transactions where the preference for locked-box accounts is clear, with 76% of deals utilising them. This emphasises private equity buyer preference for the certainty of the locked-box mechanism and an aversion to the post completion working capital and net debt true-ups. Across all transactions 21% included an element of deferred consideration but only 8% of private equity transactions employed deferred consideration. This is consistent with private equity using rollover equity and leaver provisions to incentivise sellers to continue working in the business and create value for the buyer rather than deferred consideration. This is also consistent with the tax treatment of earn-outs which are more difficult to fit within the capital gains tax and entrepreneurs relief regimes. This is where private equity buyers have an advantage over trade buyers, utilising private equity structures to make a seller s future returns more tax efficient. That said, trade buyers are alive to this disadvantage and are starting to use similar private equity structures to deliver the same tax advantages to sellers ensuring that they are not at a competitive disadvantage to private equity in auction processes. Did the transaction include either a locked-box mechanism or completion accounts? 1% 8% 6% 4% Trade Private equity Completion accounts vs locked-box (trade) 16% 84% Completion accounts vs locked-box (private equity) 24% 22% 1% 78% 76% 9% Deferred consideration all transactions Completion accounts Locked-box Completion accounts Locked-box Private equity buyers prefer the certainty of the locked-box mechanism. 21% 79% deferred consideration Deferred consideration

9 M&A and Private Equity Market Themes Warranties Almost all transactions had a cap on the sellers warranty liability. Just 4% of transactions had no cap and in all such cases the transaction value was below 5 million. Was there a cap on the sellers warranty liability? 4% 96% Across all transactions there was a fairly even split between transactions that used a cap of 1% of the consideration and those that used a -24% cap, with relatively few transactions capping at amounts in-between. What was the value of the warranty cap? Capped at 1% of the consideration 75-99% of the consideration 5-74% of the consideration 25-49% of the consideration -24% of the consideration, up to 1% for breach of fundamentals -24% of the consideration 5% 4% 6% 7% 37% 41% 9 1% 3% 4% 5%

10 The opposite was true for private equity transactions where in a majority of deals (61%) the private equity buyer was prepared to accept a warranty liability cap of between -24% of the consideration paid. This reflects the fact that private equity investors have been seeking to deploy capital in a highly competitive sellers market and, in order to win business, they have had to offer seller friendly terms in respect of liability caps. In our recent experience, private equity investors seek additional comfort through a combination of warranty and indemnity insurance, extensive due diligence and the level of rollover investment being made by management warrantors. What was the amount of the cap? (private equity) Capped at 1% of the consideration 3% 75-99% of the consideration 18% 5-74% of the consideration 25-49% of the consideration 3% 6% -24% of the consideration, up to 1% for breach of fundamentals -24% of the consideration 9% 61% 1 1% 3% 4% 5% 6% 7% Analysis of warranty claims limitation data across our transactions confirms that limitation periods for non-tax warranties are typically set somewhere between 12 and 24 months. Buyers have historically often sought to set the time limit for general warranty claims to allow for two full audits under their ownership before that time limit but whether that is possible obviously depends on the level of competitive interest in the sale process and the respective bargaining positions of the parties the statistics suggest a marginally higher number of deals end up with a time limit for general warranty claims of c.18 months. Limitation periods for commercial warranty claims More than 36 months 2% months 5% months 38% months 4% 12 months or less 15% 5% 1% 15% 25% 3% 35% 4% Proportion of transactions

11 M&A and Private Equity Market Themes We see buyer side W&I insurance being considered on a very significant proportion of private equity deals (particularly in auction processes). A significant majority of the deals assessed for this survey did however proceed without W&I cover. 35% of all transactions reviewed had a throwaway de minimis for warranty claims set at.5% or less of the consideration. On balance, private equity transactions saw a higher number of deals with the throwaway de minimis set at between.1% and.2% of the consideration, with few set above.2%. Use of Warranty and Indemnity Insurance 74% 15% 11% W&I insurance not considered W&I insurance obtained W&I insurance considered but not obtained Throwaway de minimis for warranty claims amount as a % of consideration 4% 37% 35% 33% 37% 3% 25% 26% 23% 15% 1% 16% 17% 1% 11 5%.5% or less of the consideration.6-.9% or less of the consideration.1-.2% or less of the consideration More than.2% of the consideration 35% of transactions reviewed had a throwaway de minimis for warranty claims set at.5% or less of the consideration. Private equity Trade

12 The vast majority (93%) of transactions used a basket threshold and the deals surveyed confirm that the basket threshold for warranty claims is commonly set at 1% of the consideration, with over 7% of private equity transactions set at this level, and over 4% of trade transactions. This is often matched with the approach taken by buy side W&I insurers where the standard policy deductible is often set at 1% of the enterprise value for the deal. In 72% of transactions sellers were required to give a non-compete undertaking, rising to almost 8% in private equity transactions. Was the seller required to give a non-compete undertaking? 28% Basket threshold as a % of consideration 72% 8% 7% 6% 5% 4% 75% 43% Private equity Trade Transactions that specify a non-compete period typically insist on the period being 24 or more months. Length of non-compete for all transactions 5% 4% 37% 41% 12 3% 25% 3% 17% 1% 5% 5% 1% 6% 1% 5% 5% 1% 3%.5% 1% 2% 3% more than 5% 6 months 12 months 18 months 24 months more than 24 months n-compete clauses remain an important method of retaining key management.

13 M&A and Private Equity Market Themes Tax Over two thirds of private equity transactions had a tax covenant and where a tax covenant was used 32% of those transactions applied a separate tax liability cap. There were similar levels of tax covenants used in trade transactions (68%) with a higher proportion of deals (48%) using a separate tax cap. In the majority of transactions the cap was set at -24% of the consideration. These findings confirm a strong market preference to retain a limitation period for tax claims of 6 years or more. Whilst we do see sellers seeking to impose a shorter time limit, either to take advantage of general competitive tension or because HMRC s standard time limit for making an assessment to recover tax is four years from the end of the relevant tax period, there appears to remain a general acceptance that time limits for claims will remain tied to HMRC s extended time limit for assessment of liability for tax (where there has been careless behaviour) of six years from the end of the relevant tax period. Was a tax covenant used? (private equity) 7% 3% Was a tax covenant used? (trade) 32% 68% Limitation period for tax warranty claims 8% 7% 6% 5% 4% 3% 1% 18% 24 months or less 8% 8% 66% 2-4 years 5-6 years 6 years or more 13

14 Warranty & Indemnity Insurance Trends We have seen the demand for W&I insurance continue its upward trend. In 217, the W&I insurance market received approximately 7 submissions in relation to UK transactions this equates to almost a quarter of all UK M&A (including private equity, real estate and corporate transactions). 14 W&I insurance is now commonly used across the board on small, mid and large cap transactions. Last year we saw an increase in the use of W&I on large cap transactions, including the largest ever insured transaction which had an enterprise value of 1.9 billion. Conversely, 217 saw new entrants to the W&I insurance market with a focus on SME transactions. This has resulted in a decrease to minimum premium levels and an increase in the number of SME transactions that are insured. Latest trends in the W&I Insurance Market Pricing and retentions An influx of new insurers into the market has had a downward pressure on pricing and retentions. The tables below highlight this trend. Typical Premium Rates (% of the Policy Limit) Real Estate Operational % - 1.%.6% -.8% 1.2% - 1.5%.9% - 1.3% Typical Retentions (% of the Enterprise Value) Real Estate Operational % tipping to nil Nil 1%.5% (as low as.25% for highly attractive transactions)

15 M&A and Private Equity Market Themes Nil seller recourse fact or fiction? Increasingly, we are being instructed on transactions in which the sellers have no liability under the SPA (i.e. the cap on liability is set at 1/ 1). Provided that the disclosure process is sufficiently robust and negotiations continue at an arm s length, insurers are now able to get comfortable with insuring these transactions. However, buyers often push back on these nil recourse structures, forcing sellers to stand behind the warranties. As a result of this dynamic, 217 saw an increased number of warranty packages given on a blanket knowledge qualified basis, with such qualifications often scraped for the purpose of the insurance (see Knowledge scrape in the Policy Enhancements section below for further details). Enhancing the Policy Policy Enhancements Comment Additional Premium Synthetic tax indemnity Synthetic tax indemnity (i.e. offered directly from insurer to insured under the policy if no tax indemnity provided under the SPA) now being offered by several insurers (however, comprehensive tax disclosure and DD still market standard). 1- Affirmative tax cover Most insurers are willing to provide affirmative cover for risks identified as low or very low in the tax due diligence. This means that, for the purposes of the policy, such risks are not considered disclosed. Subject to risk Knowledge scrape If a blanket knowledge is applied to the warranties, it is possible for insurers to scrape this away for the purposes of the policy giving buyers protection on an unqualified basis. 5-15% US style enhancements Certain insurers are beginning to offer US enhancements such as non-disclosure of the virtual data room and non-disclosure of due diligence reports on European deals. 1% - 3% 15 New chapters: the rise of new insurance products In 217, we saw a significant uptick in the number of tax and title policies purchased. Unlike W&I insurance, these products can cater for identified risks and, as such, they have been used to great effect to eliminate issues which might otherwise jeopardise transactions. Tax Whether held by a buyer or a seller, a specific tax risk policy provides financial cover to the insured in the event that an identified tax risk crystallises into an actual liability. These policies are typically used when affirmative cover cannot be secured under the W&I policy. However, it is important to note that tax risk policies can also be used outside of the context of an M&A transaction, e.g. to protect against uncertainties that arise from internal restructurings. The use of tax insurance policies is on the rise, with an increased number of insurers offering this product and premiums becoming increasingly competitive (now typically between 2% - 6% of the policy limit). With increased competition in the market, tax risks that are deemed to be medium or medium to high can also be insured in certain European jurisdictions. We estimate that the number of tax risk policies placed in European jurisdictions almost doubled from 216 to 217, with c.15 policies placed. The total quantum of potential tax liabilities that were insured in 217 under these policies was approximately 1.35 billion. Policy limits offered by insurers are also rising and there is capacity in the market to cover tax risks with a potential quantum in excess of 45 million. Title closing the gap With the rise of nil seller recourse transactions, buyers have increasingly relied on W&I policies to provide protection. However, the policy limit on most W&I policies is significantly below the enterprise value. This leaves a buyer exposed in the event that the seller did not own the property and/or the shares in the target. From both a cost and capacity perspective, it is not always possible to fill this gap using the W&I insurance market. As such, legal indemnity insurers have stepped into the breach, providing policies which cover the title and capacity warranties (including both title to shares and title to real estate) up to the full enterprise value typically for a premium of.1% -.2% of the policy limit. In addition to the generic coverage for title and capacity warranties, the legal indemnity market can also be used to indemnify a purchaser with respect to known and identified title risks e.g. breaches of planning regulations. Such cover is particularly helpful on transactions where real estate contributes a significant amount to the overall value of the target.

16 16 Private Equity Trends Sweet equity Whilst the level of sweet equity offered is ultimately a commercial decision and will be affected by a number of factors, including the amount of institutional strip offered to managers (which is now a common feature on secondary buyouts), nearly all of the deals surveyed had a sweet equity component, typically made up of between 1% and of the overall equity. Warranty caps Our data shows that a warranty cap of one or two times a manager s salary is typical; of the deals surveyed, 56% had a cap of one times salary and 31% had a cap of two times salary. The remaining 13% had a cap of 1.5 times salary or a cap linked to the consideration received under the SPA. The 215 and 216 data showed a leaning towards two times salary (with 54% of the deals in both years having such a cap), suggesting private equity houses are becoming more generous in the level of cap being offered; perhaps reflective of more seller friendly market conditions. Proportion of equity available as sweet equity? 6% 5% 4% 3% 1% Under 1% 1- Over What was the warranty liability cap for managers taking sweet equity? 6% 5% 21% 56% 57% 21% We also saw a move towards private equity houses accepting a distinction in warranty caps between managers receiving rollover and those receiving sweet equity only, with a lower cap for non-rollover managers being agreed in 33% of the deals surveyed. 4% 3% 31% 13% 1% 1 x salary 2 x salary other

17 M&A and Private Equity Market Themes Restrictive covenants Restrictive covenants continue to be seen as an important means of protecting value post-investment, particularly when it comes to senior members of the management team. A restrictive covenant period of 2 years continues to be most common, appearing in 6% of the deals surveyed (tracking similar levels of 6% in 216 and 62% in 215). Length of non-compete (private equity) 6% 48% 5% 4% We still see a considerable number of private equity houses pushing for arrangement fees when agreeing terms in an off-market scenario. 3% 24% 24% 1% 5% 12 months 18 months 24 months more than 24 months Building on a trend emerging in 216, this year s data shows an increased willingness for private equity houses to consider a shorter period, typically around the 1 year mark, for more junior managers, perhaps as a way of positioning bids in an auction process more favourably. Fees We have seen the number of deals where no arrangement fee has been paid (27%) fall close to the 215 level (25%) after a spike last year (6%). Whether an arrangement fee is charged will depend on the policy of the private equity house towards fees and whether the buyer feels it is paying a high price to secure the deal. We still see a considerable number of private equity houses pushing for arrangement fees when agreeing terms in an off-market scenario. Arrangement fee as % of consideration 3% 25% 15% 1% 5% 29% 19% 29% 19% 5% ne 1% 2% 3% 4% The number of deals where no monitoring fee (53%) (216: 8%) and no directors fees (44%) (216: 5%) were paid remained in the majority. Once a staple of the suite of terms insisted upon by private equity houses, they are becoming less common. As the private equity deals market continues to be very competitive for buyers, private equity houses can use their approach to fees to differentiate themselves. What is the investor director s annual fee? 5% 4% 3% 1% 4% Up to 3, per annum 13% > 3, - 4, per annum 22% > 4, 6, per annum 4% > 6, - 1, per annum 13% > 1, per annum 43% ne 17

18 Where a monitoring fee was included (more likely in an off-market deal scenario) the level of fee generally fell into the 5, to 1, range. For directors fees, where payable, a 4, to 6, range was seen most often (22%) followed by 3, to 4, (13%) and 1, or more (13%). However, the level of fee is often dictated by the level of investment made by the bidder. 18 Was there a monitoring fee used in addition to investor director s annual fee? Monitoring fees 22% 47% 53% 56% 22% Under 5k 5k to 1k Over 1k

19 M&A and Private Equity Market Themes Leaver circumstances Good leaver circumstances remained consistent with previous years with death, ill health and board discretion appearing on most transactions. Wrongful dismissal appeared as a good leaver event in just under half of the deals, suggesting a move back towards this being an accepted limb of the good, rather than intermediate, leaver definition (wrongful dismissal constituted a good leaver event in 59% of deals in 215 but only 4% of deals in 216). Good leaver circumstances 1% 1% 94% 83% 8% 6% Retirement appeared in just under 4% of the deals surveyed, perhaps being viewed as an easy give in auction processes. 4% 44% 39% Unfair dismissal constituted a good leaver event in just over of the deals surveyed, but on balance we tend to see private equity pushing to avoid this being a good leaver circumstance given the uncertainty it can create (in 215, none of the deals we surveyed included unfair dismissal as a good leaver event, increasing to only 1% of the deals surveyed in 216). An intermediate leaver concept appeared in 28% of the deals surveyed, suggesting a slight increase in the willingness of private equity houses to offer some form of vesting for management. Vesting on a straight-line basis, over a period of between 2 and 4 years was the most common position in the deals surveyed, and in all cases related to management being entitled to receive market value for (rather than being entitled to retain until exit) the vested portion of their equity. Is intermediate leaver concept included? 72% Death Ill health/incapacity 28% Board discretion Wrongful dismissal Retirement 22% Unfair dismissal 11% Other 19

20 2 In the majority of deals surveyed (83%) leaver provisions applied to both rollover and sweet equity, with managers obliged to offer up all of their equity for sale (i.e. not being entitled to retain their rolled-proportion) with the distinction between rollover and sweet being represented by the difference in value attributed to that equity (usually market value for rollover in all circumstances other than very bad leaver and sweet being subject to the good/bad leaver valuations). Preference shares and loan notes Due to changes in tax legislation we expect to see an increase in the use of preference shares in the structuring of private equity investments, which were used in 32% of the private equity transactions we surveyed, where the coupon was typically between 1% and 12%. In a small number of the deals surveyed (8%) the investment agreement included an obligation on managers to re-invest any proceeds of their newco equity received following a leaver event into loan notes of newco. Some private equity houses do not accept management receiving any proceeds before an exit event. Do leaver provisions apply only to sweet equity or rollover equity too? 83% 17% Were preference shares used? 32% 68% Both Sweet only We expect to see an increase in the use of preference shares in the structuring of private equity investments.

21 M&A and Private Equity Market Themes As with previous years, 1% is the dominant interest rate for institutional loan notes although we have seen a drop in the percentage of deals where this rate has been agreed to 37% this year (215: 6%; 216: 61%). This may be a reflection of the competitive nature of a number of deals surveyed. The trend over recent years where loan notes or preference shares held by private equity investors rank equally remains high at 73% (216: 83%) which is reflective of the competitive nature of the market. Investors continue to be willing to agree this position provided that they do not feel that the valuation has been pushed uncomfortably high and the investor controls enforcement of security by acting as security trustee. Linked to this concession is the requirement for private equity investors to be able to vary the terms of management s loan notes / preference shares, which includes having the right to sell them at a discount or write-down their value, without first obtaining the consent of management holders in order to protect investors against management frustrating any refinancing or sale in a downside scenario. Interest rates on institutional loan notes 5% 4% 37% 3% 26% 16% 11% 1% 5% 5% 8.% 9.% 1.% 11.% 12.% 12.5% Ranking of institutional loan notes 21 27% 73% Pari passu Investor prior ranking

22 22 Swamping Swamping rights remain a common way for private equity houses to protect their investment in the event of a material default or downturn in business. In line with last year s data, a breach of banking covenants and un-remedied breach of the investment documents appeared as swamping triggers in the majority of deals surveyed. A breach of equity covenants appeared in half of the deals surveyed, and where external debt was provided, with these being set at a percentage tighter than the banking covenants (often removing the need for a limb relating to an anticipated breach of the banking covenants). Unusually, a failure to pay amounts due on the investor loan notes appeared in under half of the deals, although this is clearly dependent on loan notes having been issued as part of the structure. The other category is represented by anticipated breaches of the banking documents (usually where no equity covenants were included), certain key members of management leaving the business (more typical on minority investments) and EBITDA/cash-flow tests (again, in the absence of equity covenants). In what circumstances can investors invoke swamping rights? % Breach of banking covenants Can investors oblige leaver to reinvest in notes? 8% 8% Un-remedied breach of investment documents 5% Breach of investor covenant 3% Failure to pay interest or principal or any loan notes when due Insolvency related events 6% Other 92%

23 M&A and Private Equity Market Themes Pinsent Masons Private Equity Practice Turning dry powder into healthy returns Our award-winning international private equity practice goes from strength to strength, with a reputation as one of the largest commercial legal advisers to our global sectors. We have offices across all three UK jurisdictions and spanning Europe, Middle East, Africa and Asia-Pacific. The standing of our international private equity practice was recognised again in 217 with an award for being the M&A Team of the Year (British Legal Awards). The team was ranked in the top five for numbers of deals completed (The Lawyer) and in Tier 1 of private equity law firms (Legal 5). Edward Stead Partner, Head of Private Equity T: M: E: edward.stead@pinsentmasons.com To find out more about our team, other specialist reports, or to sign-up for legal updates, please visit 23 Howden The largest M&A insurance broker in Europe w the largest M&A insurance broker in Europe, we have a reputation for providing a world-class service by combining informed advice with the best products available from the insurance market. We have offices in the UK, Germany, Spain and Singapore, with over 3 people dedicated to M&A. The diversity of our team, which includes solicitors, investment bankers, tax accountants and insurance professionals, allows us to understand our clients needs and respond with targeted and innovative solutions. To find out more about our team, please visit Caroline Rowlands Head of Private Equity Solicitor T: M: E: caroline.rowlands@howdengroup.com

24 Howden Insurance Brokers AB. is a trading name of Howden Broking Group Limited, part of the Hyperion Insurance Group. Hyperion Insurance Group Limited is registered in England and Wales under company registration number Registered Office: 16 Eastcheap, London EC3M 1BD. This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership, registered in England and Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate jurisdictions in which it operates. The word partner, used in relation to the LLP, refers to a member or an employee or consultant of the LLP, or any firm or equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is available for inspection at our registered office: 3 Crown Place, London, EC2A 4ES, United Kingdom. Pinsent Masons 218. For a full list of the jurisdictions where we operate, see