Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Predominantly, private equity investors aim to acquire majority stakes in German companies. However, given the lack of suitable target companies and target companies seeking fresh money or equity, private equity investors are considering acquiring minority interests as well.
Leveraged buyout transactions dominate the private equity market in Germany. But given the current market and the increased reluctance by banks, we have seen an increasing number of transactions in which private equity acquirers fully fund their investments with equity and try to get debt financing at a second stage. The further increase in interest on loans catalyses such development. We have also experienced an increasing number of add-on transactions of portfolio companies held by private equity investors as a consequence of buy-and-build strategies and the requirement for follow-up financings in existing portfolio companies.
In most transactions, a private equity acquirer is willing to grant the management an equity portion in order to align interests with the management team. This management equity portion is in general, again, leveraged in comparison with the interest of the private equity acquirer.
Beside the acquisition of equity portions, we have also seen investment in other instruments such as profit participation rights or silent partnership interests. The private equity acquirer’s willingness to enter into such investments depends on the particular case and strategy.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
Private equity investors in Germany typically acquire private companies in leveraged buyout transactions that are organised as either limited liability companies, stock corporations or limited partnerships. The law provides for a framework of governance rules for each form of organisation, including, for instance, inalienable shareholder rights, necessary bodies or organs of the company, capital maintenance rules and requirements for insolvency filing.
The corporate governance rules imposed by statute are stricter for stock corporations and much more flexible for limited liability companies and limited partnerships. The strictest and most limiting corporate governance rules apply to listed companies, which have to be organised as a stock corporation (AG), a Societas Europaea (SE) or a limited partnership of shares (KGaA): for example, listed companies are required to comply with the codified corporate governance rules set out in the German Corporate Governance Code, last amended in April 2022, and with reporting and disclosure requirements on sensitive information that private equity investors typically do not want to share publicly.
The governmental commission presented the latest amendment to the German Corporate Governance Code in April 2022, which was adopted and published in June 2022. Inter alia, ESG criteria (environmental, social and governance) have been implemented in the German Corporate Governance Code as a guideline for the management board and supervisory board activities. Legally required gender participation on the management board has to be complied with and a minimum participation of women on the management board has to be observed.
As a result, private equity sponsors typically aim for acquiring or transforming the target company into a limited liability company in order to preserve maximum flexibility. In a limited liability company more specific corporate governance rules are usually set out and agreed in the corporate documents (ie, articles of association, partnership agreement, shareholder agreement, rules of procedure for management, etc) of the target company. These further rules aim to increase control over management and limit its power. The rules that are imposed on management in addition to statutory requirements are mostly driven by the responsibilities of the private equity sponsors to supervise and control the management of the target companies in accordance with their internal portfolio guidelines.
Typically, private equity sponsors will only accept the stricter governance rules that apply to the target company after its transformation into an AG for an exit through an initial public offering.
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Private Equity-Transactions-Chapter-Germany_Lexology, Law Business Research, 2024
This article was first published in: Private Equity – Transactions, Getting the Deal through, Lexology, Law Business Research, 2024 (generated on 19 April 2024)