Private equity cap tables need a tailored solution: telling the whole story

Private equity sponsors use Management Incentive Plans (MIPs) at the portfolio level to align the portfolio management teams’ risk and reward with their own and to motivate management in working towards a successful exit. 

While the industry is well adept at designing MIPs, implemented plans can be notoriously difficult to administer and manage. This is because MIPs often give rise to complex cap tables with multiple instruments and holders. It is common to encounter issues emanating from poor administration during exit processes, resulting in wasted time, cost, and energy.

In this blog, we highlight the reasons why private equity cap tables could benefit from a tailored solution.

Complex investment structure. As the enterprise value increases, so does the complexity of the capital structure. Higher-value businesses are more likely to have sponsors and co-investors aggregated at different levels in the acquisition structure. MIPs can also be more widely spread amongst employees, causing management feeder vehicles to be used to reduce the administrative burden of maintaining the plan. A single company or single-level cap table will only tell part of the story of such structures, which is why a multi-tiered solution such as DealsPlus is crucial.

Investment Lifecycle. Private equity portfolios often use bolt-on acquisitions as a strategy to grow. This comes with its complexity as the acquired portfolio management will need to be brought within the MIP – either at the group level or at a ring-fenced level. Furthermore, private equity-backed businesses often go through secondary and tertiary buyouts, resulting in an ever-growing holding stack. With DealsPlus, each holding company and its full history can be retained in one place and the evolution of the capital structure can be tracked through instrument exchanges, transfers, and buybacks. At exit, the full history can quickly be presented to your advisors to prepare vendor due diligence papers. 

Coupon bearing and other shareholder instruments. It is common in private equity structures to embed a hurdle rate in the cap table via the use of coupon-bearing and other shareholder instruments such as preference shares or loan notes. To administer a private equity cap table requires the administration of all shareholder instruments, along with the calculation of the interest schedules – taking account of all the transactions during the holding period. This is fundamental to valuation and the eventual payout on the MIPs.

Single Source of truth. One major pain point we observe with private equity-backed portfolio cap tables is their disjointed nature. For example, portfolio management and the private equity house often use an excel file to track and manage cap tables (e.g. the commercial cap table); in addition, there is a separate share register that records the ownership of all the equity instruments (e.g. the legal register); and, finally, there are the legal documents that were signed to implement the plan. We have often observed differences between the three that can cause unnecessary complications, often during a transaction process. A tailored solution like DealsPlus brings the commercial cap table, the legal register, and the underlying documents, all in one place and keeps them in sync.  

Compliance. Private equity cap table events can often trigger compliance requirements – e.g. need for a tax valuation and/or a tax election to be prepared and filed within predefined deadlines. There is no point in designing a complex MIP structure and losing its tax advantage due to poor administration. A tailored solution would enable users to identify and manage compliance obligations based on cap table events.

Well-maintained portfolio cap tables enable better portfolio valuation and reduce the chances of diligence findings at exit. A tailored cap table solution like DealsPlus is essential for private equity-backed businesses. It provides a complete and real-time picture of the capital structure, giving both the management and the PE sponsor the visibility and control they need to make informed decisions.