This Nixon Peabody blog addresses the growing trend of middle market private equity firms seeking outside investors in the firms themselves – as opposed to their fund vehicles.  The major reasons for this trend include meeting the firms’ needs for growth capital, facilitating generational transfers, and deepening ties with existing fund investors.

The first two reasons for seeking outside capital could apply to companies in any industry – but the idea of seeking out capital in order to deepen ties with fund investors is unique to the fund business.  Here’s an excerpt discussing how selling minority interests in the firm can enhance relations with fund investors:

Historically, minority investors in private equity firms have been current or former fund limited partners. Selling a minority stake in the firm to a long-time fund limited partner allows both the private equity firm and the limited partner to develop a deeper institutional tie. Private equity firms look for minority investors with industry expertise, deal sourcing networks and value beyond their capital.

Limited partners are attracted to minority investments in private equity firms because their investment maintains a steady stream of income from profits and distributions and avoids the fees associated with investments at the fund level. Becoming a minority investor at the firm level could also open up additional investment opportunities at the fund level.

The blog points out that – unlike fund investments – capital invested at the firm level may be tied up indefinitely without an express commitment to a future liquidity event.

– John Jenkins

Yesterday, in DFC Global v. Muirfield Value Partners, the Delaware Supreme Court reversed the  Chancery Court’s decision to award a premium over the merger price in an appraisal case involving an arm’s-length deal & a robust sale process.  As I previously blogged, the DFC Global case attracted a lot of interest from practitioners and academics – particularly for the potential impact of the company’s argument that the merger price in an arm’s-length deal should be deemed to represent fair value.

In his opinion for the Court, Chief Justice Strine declined to establish such a presumption:

The  respondent argues that we should establish, by judicial gloss, a presumption that in certain cases involving arm’s-length mergers, the price of the transaction giving rise to appraisal rights is the best estimate of fair value. We decline to engage in that act of creation, which in our view has no basis in the statutory text, which gives the Court of Chancery in the first instance the discretion to “determine the fair value of the shares” by taking into account “all relevant factors.”

While it didn’t establish a presumption in favor of the merger price, the Court did conclude that in light of the strong & arm’s-length sale process, the reasons that Chancellor Bouchard gave for allocating only 1/3rd weight to the merger price were insufficient. Those reasons focused on regulatory risks confronting the seller during the relevant period & the fact that the purchaser was a financial buyer.

The Supreme Court also questioned the Chancellor’s approach to the DCF analysis used in his opinion.

In remanding the case to the Chancery Court, Strine noted that there was no “one size fits all” approach to appraisal:

In some cases, it may be that a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort that best estimate. In other cases, it may be necessary to consider two or more factors.

The Chief Justice went on to say that what’s required is for the Chancery Court “to explain its weighting in a manner that is grounded in the record before it. That did not happen here.”

– John Jenkins

Joe Feldman has launched this new survey focused on identifying best practices in pre-closing planning for successful acquisitions. Of particular interest are the strategic side of diligence, internal deliberations & discussions ahead of a decision to proceed. If you complete the survey, you can also request a copy of Joe’s final report.

– John Jenkins