Just Keep Buying: Proven Ways to Save Money and Build Your Wealth
by Nick Maggiulli · 15 May 2022 · 287pp · 62,824 words
should have optimized, but my time. While many of my friends went off to big tech firms (Facebook, Amazon, Uber, etc.) and got that sweet, sweet equity compensation, I worked at the same consulting firm for six years where I was paid generously, but had no such upside. I didn’t realize
Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl and Bowen White · 15 Jun 2017
and Incentivizing Management Teams in Buyouts Exhibit 12.2 The PE Owner’s Role: Two Views Exhibit 12.3 Two-tiered “Sweet Equity” Structure Exhibit 12.4 Cash Flow and “Sweet Equity” Returns at Exit Chapter 13 Exhibit 13.1 Operational Value Creation Levers Exhibit 13.2 Operational Value Creation Support Exhibit 13.3
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portfolio company. While the structure of these compensation plans magnifies management’s potential returns on the upside, it comes with risks. A management team’s “sweet equity” and stock options produce a return several multiples of that realized by the PE fund, should an investment perform as planned. However, in the case
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common equity—or fully diluted common equity when options are employed in the plan—relative to their proportion of total equity capital invested. Thus, this “sweet equity” can provide a high return on investment if the company does well; however, if an investment performs poorly, management’s stake is at risk of
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upon hitting certain company performance milestones, or a profit interest in the company. Management plans in Asia vary even more widely, with different markets employing sweet equity, options and profit interests, and no real established best practices. The expected payout of these compensation plans differs significantly from those offered by incentive schemes
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EXAMPLE FROM EUROPE To highlight the upside potential and downside risk in management compensation plans, we step through an example with a simplified two-tiered “sweet equity” structure based on a hypothetical LBO. “Capital Partners” acquires a semiconductor business with an enterprise value of €1 billion, funded by 65% bank debt and
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equity with a 10% annual dividend paid-in-kind (PIK), resulting in the capital structure shown in Exhibit 12.3. Exhibit 12.3 Two-tiered “Sweet Equity” Structure The implications of this incentive structure are best illustrated through various business scenarios and possible outcomes at exit—a downside case, a base case
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proceeds (€186.2). The cash flows and returns generated in the three scenarios are shown in Exhibit 12.4. Exhibit 12.4 Cash Flow and “Sweet Equity” Returns at Exit As shown, a well-structured management compensation plan can deliver significant upside to management teams if and when they deliver on a
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equity firms do better than others (2010). 3 Cornelli and Karakas (2012); Gilligan and Wright (2012); Schneider and Lang (2013). 4 Also referred to as “sweet equity.” 5 The preferred shares or shareholder loans typically provide an annual return of 8–12% PIK, with interest accruing to holders rather than cash. In
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after a significant portion of the current fund (e.g., 75%) has been invested, resulting in a new fund about every three to four years. Sweet Equity Equity (or options) issued to management at a discount to incentivize and align interests of management with shareholders. Tag-along Provision A tag-along provision
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-state end-of-fund life options strategic alignment strategic buyers structural subordination structured secondaries structuring deals style drift subscription process subsequent closings success succession swaps sweet equity syndication tag-along provisions tail-end funds talent attraction Tank & Rast service stations target allocations target returns target valuation buyouts enterprise value growth equity toolkit