A comprehensive guide to private equity law

Private equity law is a pivotal aspect of the legal framework that governs private equity funds, investments, and transactions. This legal area ensures the smooth operation, regulation, and management of private equity funds, safeguarding the interests of investors, companies, and stakeholders involved. Our guide explores private equity law, offering an overview essential for navigating the complexities of private equity investments.

Understanding private equity funds

Structure and operation

Private equity funds are established by private equity firms, which act as the fund managers. The private equity firm identifies investment opportunities, raises capital from investors, and forms a new fund dedicated to making investments in specific sectors, industries, or geographic regions. Private equity funds use the pooled capital from investors to acquire equity ownership in companies. These funds are typically structured as limited partnerships, with the private equity firm acting as the general partner (GP) and the investors as limited partners (LPs).

Investment strategies

Private equity firms employ various strategies to generate returns for their investors, including:

• Leveraged buyouts (LBOs): Acquiring companies using a significant amount of borrowed money.
• Growth capital: Investing in growing companies requiring capital to expand.
• Distressed investments: Investing in undervalued or financially struggling companies.

The strategy is determined by the fund’s investment mandate, which may have a focus on particular industries, stages of development, or locations.

You might also be interested in…

• A comprehensive guide to private equity

Regulatory framework

The regulation of private equity funds in the UK is primarily overseen by the Financial Conduct Authority (FCA), ensuring compliance with financial and investment laws. Key regulations include:

• The Financial Services and Markets Act 2000 (FSMA): Governs the operation of financial services in the UK.
• The Alternative Investment Fund Managers Directive (AIFMD): EU directive implemented in the UK, regulating the management and marketing of alternative investment funds.

Key legal considerations in private equity transactions

Due diligence

Conducting thorough due diligence is critical in private equity transactions. It involves evaluating the target company’s financial performance, legal standing, and operational risks. This process aids in making informed investment decisions and structuring the deal.

Contractual agreements

Private equity transactions involve complex contractual agreements, including but not limited to:

• Share purchase agreements (SPAs): In an acquisition, the SPA sets out all terms and conditions of the purchase of shares in the target company.
• Limited Partnership agreements: This agreement documents the relationship between the private equity firm (i.e. the general partner) and investors (i.e. the limited partners). In particular, it details their roles, contributions, and how profits are shared, management fees, carried interest, governance structure, and the fund term.
• Investment agreements: Outline the conditions of the investment, including representations, warranties, and indemnities.
• Management agreements: The MSA sets out the terms of management services offered by the private equity firm to the target company during an investment. It covers areas such as strategic planning, operational assistance, executive pay, board representation, and exit strategies.
• Shareholders’ agreement: this regulates the relationships among the parties engaged in the investment. It deals with matters like governance, decision-making processes, transfer limitations, financing setups, exit strategies, and resolving disputes.
• Debt financing agreements: these include loans, credit agreements, and security documents are employed to organise and document the financing from lenders. These agreements detail the conditions of the debt, encompassing interest rates, repayment schedules, covenants, security interests, and provisions for defaults

Exit strategies

An exit strategy is a plan for a private equity firm to realise its investment in a target company. Common exit routes include:

• Initial public offerings (IPOs): Listing the target company on a public stock exchange. This will allow the investors to acquire and dispose of the shares freely on the open market.
• Trade sales: Selling the company to another business in the same or a similar industry.
• Secondary buyouts: Selling the company to another private equity firm or financial investor.
• Management buyout: the existing management team of the target purchases the company from its current owners

Ethical considerations and Environmental, Social, and Governance (ESG)

Ethical considerations and ESG criteria are becoming increasingly important in private equity. Firms are adopting ESG principles to enhance long-term value creation by focusing on sustainable and responsible investment practices.

Some ESG factors that the private equity firm would consider in respect of the target include, but are not limited to:

• sustainability
• the carbon footprint
• compliance with environmental regulations
• efforts towards reducing environmental risk
• the target’s impact on society
• labour practices
• diversity and inclusion
• human rights
• product safety

Whether the target is running any initiatives in relation to, amongst other things, employee welfare, community development and engagement, and fair labour. Private equity law plays an essential role in facilitating the growth and management of private equity funds and investments. Understanding the legal framework, regulatory requirements, and best practices is crucial for investors, legal professionals, and companies engaging in private equity transactions. Our guide provides a comprehensive overview, designed to equip stakeholders with the knowledge to navigate the private equity landscape effectively.

Contact Moore Barlow solicitors to discuss how our private equity solicitors can help you.