August 5, 2020

Private Equity: Covid-19’s Global Impact

This Ropes & Gray memo reviews the pandemic’s impact on private equity around the globe. For the North American market, topics include, among others, portfolio companies’ response to the pandemic, the terms of credit agreement amendments & waivers, emerging deal terms, financing arrangements & the terms of minority investments. This excerpt addresses how the Covid-19 pandemic may influence the evolution of deal terms relating to closing certainty:

As was the case in the aftermath of the 2007-2008 financial crisis, the 2020 market dislocation is likely to lead buyers, sellers and their counsel to closely examine certain typical deal terms related to closing certainty, and may result in the evolution of some of these provisions. For example:

– a further increase in the number of successful bids involving full equity backstop commitments from PE sponsors (a trend that had preceded 2020 and appears to have further accelerated in the pandemic);

– increased focus on the size of reverse termination fees in transactions where a full equity backstop is not available;

–  variation in the size of the reverse termination fees, depending on whether payment of the fee is triggered by the buyer’s willful breach or solely as a result of a debt financing failure;

– closing any “daylight” in the interim “ordinary course of business” covenant; and

– changes to the “conditional” or “limited” specific performance construct (i.e., the deal construct that allows the seller to force the buyer to close, as opposed to paying a reverse termination fee when closing conditions are satisfied and the buyer’s debt financing is or would be available at a closing.

The memo also summarizes the pandemic’s impact on Asian and European markets, and on PE fundraising activities.

John Jenkins