1. Private equity transactions Jonathan Wood 21 September 2007

2. Introduction What is private equity? Why do we care?

3. Types of private equity transaction Leveraged buyouts (LBOs) - Institutional buyouts - Management buyouts (MBOs) - Management buy-ins (MBIs) - Buy-in/management buyouts (BIMBOs) Other types of private equity - Start-ups - Development capital

4. Parties and their motivations Main motivation: monetary gain Sellers - chance to sell to a non-competitor (often at a higher price) Investors - advantage of leveraged structure and comfort of management participation Private equity house’s employees – carried interest and co-investment Management – get financial stake in company Banks – fees and interest Risk/reward

5. Economics of an MBO Funding of purchase price of 200 Use of sale proceeds of 300 (after repaying 50 of senior debt and after improving the business) PartyProceedsInvestmentCapital profit% Capital profit Senior lender150 Nil Institution16848120250 Management322301,500

6. Typical structure Management Private equity funds Senior bank Newco Newco 2 Target Seller Shares Debt Mezzanine bank Debt Shares and loan notes Inter-company loan Consideration Bond finance Co Debt

7. Sources of finance Equity: ordinary shares ( management/investor) : loan notes (investor) Senior debt: term and working capital Junior debt: mezzanine (with subscription rights?) : high yield bond

8. Key documents Management Private equity funds Senior bank Newco (Articles of association) Newco 2 Target Seller Senior facility agreement Mezzanine lenders Mezzanine facility agreement Acquisition agreement (and transitional services agreement if necessary) Bond finance Co Bond indenture Shareholders agreement Intercreditor agreement Employment agreement Loan note instrument Inter-company loan agreement

9. Key equity document issues Acquisition agreement - Interconditionality with facility agreement - Warranties (as for trade sale) and assignment to lender Shareholders agreement/Articles of association - Subscription obligations and management warranties - Investor control rights, information rights and fees - Transfer restrictions – investors/managers, drag and tag provisions - Management incentivisation - Good/bad leaver and ratchet Management employment agreements - Restrictive covenants - Dismissal

10. Key banking document issues Senior facility agreement Mezzanine facility agreement Intercreditor agreement

11. Current issues Availability of debt Challenge from hedge funds Overcapacity/competition for deals Pension liabilities Inland revenue