Creative Deal Structures for Private Equity Firms, Other Investors

Deal-making requires innovative approaches to navigate market complexities. In 2024, we’ve seen private equity groups increasingly leverage creative deal structures to secure attractive investments and boost returns. Here are some of the most promising strategies:

Earnouts and contingent payments

Earnouts and contingent payments are becoming increasingly popular, especially in uncertain economic environments. These structures allow buyers to pay part of the purchase price based on a target company’s future performance. This aligns the interests of both parties and helps mitigate the buyer’s risk.

Minority investments with control rights

Private equity firms are exploring minority investments while negotiating control rights. This approach allows firms to invest in high-growth companies without requiring a majority stake, while still influencing key decisions and strategic directions.

Structured equity

Structured equity combines elements of debt and equity, providing a flexible financing solution. This structure can include preferred equity with features like cumulative dividends, liquidation preferences, and conversion rights, offering downside protection and upside potential.

Joint ventures and strategic partnerships

Forming joint ventures and strategic partnerships with other investors or industry players can enhance deal opportunities. These collaborations can provide additional capital, industry experience, and operational synergies, making it easier to close deals and drive value creation.

Seller financing

Seller financing involves the seller providing a loan to the buyer to cover part of the purchase. This can be an attractive option for sellers looking to achieve a higher valuation and for buyers seeking to reduce upfront capital requirements.

Roll-up strategies

Roll-up strategies involve acquiring multiple smaller companies within a fragmented industry to create a larger, more competitive entity. This approach can lead to significant economies of scale, increased market share, and enhanced valuation multiples.

Alternative lending and mezzanine financing

Private equity firms are increasingly turning to alternative lending and mezzanine financing to bridge funding gaps. These structures offer flexible terms and can be tailored to meet the specific transaction needs, providing an additional layer of capital without diluting equity.

Revenue-based financing

Revenue-based financing ties repayment to a target company’s revenue performance. This structure is particularly appealing for high-growth companies with strong revenue potential but limited access to traditional financing.

ESG-linked financing

With the growing emphasis on environmental, social, and governance (ESG) factors, private equity firms are incorporating ESG-linked financing into their deals. These structures tie financing terms to achieving specific ESG goals, aligning financial incentives with sustainable business practices.

How CLA can help with deal structures for private equity

CLA is available to help structure creative deal structures that can play a crucial role in securing successful investments. By leveraging these innovative approaches, private equity firms can mitigate risks, align interests, and unlock new opportunities for growth and value creation.