Why do PE firms sometimes only acquire a controlling stake (e.g. 51%) and not a full 100% stake?
What are the advantages and disadvantages behind only acquiring a controlling stake rather than a full stake? Is it mainly a difference in the returns?
Typically the original management team will stay on board for at least a couple of years following the acquisition. The management team will often rollover some of the equity in order to incentivize them to continue to grow the business until the transition period is complete.
The easier answer is that a PE firm may not be able to afford a 100% acquisition with pure equity investment as in the case of a growth equity play
It allows for more portfolio diversification. If you have enough opportunities to invest in, 2 companies at 51% each vs 1 company at 100% allows for more diversification while still guaranteeing full decision making control and majority voting power.
Sellers sometimes want to roll a partial interest if they think the company has further upside.
There also may be other investors in the Cap Table with different return profiles that have equity stakes - Mezz for example, or Preferred if its a growth deal.
Simply because its less risky - just because you have you have a winning hand doesn't mean you all in every single time.
That's not really true. If you were worried about diversification, you would just do smaller deals @ 100% ownership rather than 50% of larger deals.
Not true, If a PE fund came across an attractive opportunity that required something above their preferred check size, they wouldn’t necessarily pass it up. There are also benefits to having more investors at the table besides the fund.
One key advantage is PE investments are typically structured as preferred equity and the management rollover would be common. Buying 51% in a preferred security provides lots of downside protection (i.e. first 49% of decline in value is absorbed by rollover). Management alignment and incentive to continue working hard is also important.
I'd say #1 is you get control with fewer $ at risk.
2, as others have said - it's important to have management with skin in the game / equity incentive.
3 The controlling PE firm may want to bring in other owners who fill/complement their own expertise/skillset.
It most often happens when the founder-owner does not want to sell 100% but PE firms need control as part of its mandate/strategy. Along with 49% ownership for the founder, he will get a host of minority controls such as veto rights and the like
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