Control Issue

By Dennis McCarthy – (213) 222-8260 –

Welcome to the Private Equity Series, raising capital for middle market private companies.

In this video, I’ll address a key element in private company transactions, which is control.  As I’ll explain, private equity investors almost always demand some degree of control.

Let’s start by describing what I mean by control.

In most companies, management has practical, day to day control of what goes on.  That typically includes hiring and firing, executing marketing plans, producing goods and services, the daily nitty gritty.

So, what type of control do I mean when I say private equity control?

This control is more top level control, big picture items, (whether to sell the company, buy another company, raise capital, set strategic direction, maybe approve budgets). 

Private equity investors typically demand some degree of top level control.

Yes, there are lots of variations, just what’s included or excluded is the subject of negotiation with the private equity investor.

The private equity group’s percentage ownership certainly influences its leverage in that negotiation.

In typical leveraged buyouts, LBOs, where the private equity group owns 80-90%, control is likely absolute.

But what about situations where the private equity investors own 40-60% of the company?  In this range, there’ll likely be serious negotiation over which elements of control the investor holds.

For example, a relatively common provision would give the private equity investor the right to force the sale of the company after a period of time in order to cash out the investment. 

Now what about situations where the private equity investor has a clear minority ownership, say, less than 40%?

Even at this level of ownership, a private equity investor may demand some control features such as board seats, veto provisions on certain actions like raising capital or put rights which may force a sale or recapitalization.

Sometimes, I see minority investors invest in junior debt securities that have covenants to control a company.   For example, junior debt covenants might restrict the absolute amount of debt a company can borrow.

So what’s the take-away.

A company raising private equity should expect that there will be negotiation over control, probably not control of the day to day operations, but rather control over the top level decisions, selling the company, raising capital, etc.  It’s a common element in raising private equity.

Please contact me to help your company to raise private equity or any capital market project.