CAMPBELLS


ACQUISITION DEALS BY PRIVATE EQUITY FUNDS Several important factors need to be considered


MERGER AND during an acquisition by a private equity fund— After a number of years in which merger and acquisition (M&A)


not least, its exit strategy, as Marc Parrott explains. The Fund Documents may include investment mandate


activity was relatively dormant, and many private equity managers were more focused on restructuring troubled investments made before the financial crisis, the markets are now seeing a return of private equity managers to M&A activity.


Strategic corporate acquirers and private equity funds are both


becoming more active as they see more meaningful signs of recovery in the US economy and are becoming more optimistic that this recovery, and a broader global recovery, will be sustainable.


These types of broad macro considerations will apply to corporate


deal-making generally, whether by strategic corporate acquirers or by private equity funds.


In every merger or acquisition deal there are many common


considerations regardless of the buyer’s identity, including the importance of negotiating the price, the representations and warranties, and the need to conduct thorough due diligence. But there are many other factors to be considered during an acquisition by a private equity fund that are different from those of a strategic corporate acquirer.


First, and most obviously, any private equity fund general partner,


investment manager or investment advisor considering a potential transaction will need to ensure the proposed investment falls within the investment mandate, and investment restrictions, set out in the offering documents (ie, private placement memorandum or offering memorandum) and partnership agreement, etc, of the relevant fund (together, the Fund Documents).


requirements such as geographical target countries or economic zones for investment, target size requirements regarding minimum net assets or minimum revenues, target industries, and minimum leverage requirements.


In addition, the documents may impose portfolio diversification


limits on the amount of the overall fund that may be invested in any single portfolio investment, and may exclude investments in certain industries such as weapons or tobacco products manufacture.


Many private equity funds include wording in their Fund


Documents that provides for investors to be relieved of their obligation to make a capital contribution if any breach of applicable laws or applicable regulations would result. These types of “excuse provisions” will usually provide that, where a particular investor will not participate in a particular drawdown, all the other investors will be required to make an additional drawdown pro rata to cover the shortfall.


Of course, no investor would be required to contribute an amount


that would cause its total capital contributions to exceed the amount of its total capital commitment.


This mechanism usually means that the relevant private equity fund


will be able to meet its contractual obligations under any share purchase agreement that has been entered into. However, if any investor needs to invoke an excuse provision it will be best to determine this as soon as possible in the acquisition evaluation process, in order to avoid last- minute issues when the transaction is nearing closure.


CAYMAN FUNDS | 2012 51


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