April 11, 2025
Private Equity: Full Equity Backstops On The Rise
Ropes & Gray recently published a survey of trends in Private Equity mergers & acquisitions. One interesting development noted in the survey is the increasing use full equity backstops in PE deals. In a fully backstopped deal, the sponsor provides an equity commitment in the full amount of the purchase price, so that the deal will close even if the debt piece of the financing falls apart.
This deal structure has been around for some time, but in recent years, the use of reverse termination fees to provide sellers with some comfort about closing certainty has been a much more common approach. Ropes & Gray says that based on data from the deals the firm’s been involved with, that’s changed over the past year:
The thawing of the financing markets in 2024 made for a more competitive landscape, and PE sponsors increased their use of the “full equity backstop” (as compared to reverse termination fees (RTFs)) to make their bids more attractive. In the more challenging M&A landscape of 2023, the use of the full equity backstop declined in our dataset to the lowest level in five years, and over 60 percent of our 2023 transactions used the RTF construct. However, in transactions that R&G closed in 2024, PE sponsors once again took advantage of the “full equity backstop” structure, and 60 percent of our transactions included that construct, which was the highest percentage that we have ever seen.
The survey also found that financing conditions, which were common in prior decades, didn’t appear in any of the deals reviewed in 2024, and the average size of reverse termination fees for sponsor-backed deals that used that structure remained in the 5 to 6% range.
– John Jenkins