1. Private Equity ownership structures
Private equity funds use management equity plans to incentivise and align interest with management teams. For commercial and tax reasons, management equity plans are implemented by issuing different instruments in a portfolio company’s capital structure – generally referred to as strip and sweet equity instruments. Each instrument has different terms that determine their value under a distribution waterfall (for example, strip equity will have a built-in return before sweet equity can participate).
2. Ownership data
Due to the ownership structure described above, each private equity portfolio company has multiple instruments held across many shareholders (fund entities, management shareholders, and co-investors).
|
Portfolio type |
Number of instruments (Strip & Sweet equity) |
Number of shareholders (fund entities, management, co-invest) |
Average shareholdings in the portfolio |
|
Ownership thinly spread |
3 – 5 |
20 |
80 |
|
Ownership moderately spread |
3 – 5 |
50 |
200 |
|
Ownership broadly spread
|
3 – 5 |
100+ |
400 |
*Note: A shareholding is a shareholder’ interest in one instrument; one shareholder may have multiple shareholdings in a portfolio if they are invested in more than one instrument.
Extrapolating the above across all the portfolios held by a fund, there would be thousands of shareholdings (assuming a fund has 10 or more portfolios). This data is rarely available in one place and exists in a fragmented form across multiple files and systems. This can lead to wasted time and cost during portfolio valuations and exit events.
3. Ownerships and economics are changing
The ownership position and cap table economics at the portfolio level will change throughout the holding period due to events at the portfolio level – e.g., drawdowns, distributions, resets, joiners, leavers, buybacks, interest accruals on hurdle tracking instruments such as preference shares or loans. Without a standardised system, it can be difficult to track and monitor these changes efficiently across a fund’s portfolio.
4. Impact on valuations and waterfall
As each instrument in the cap table has separate terms and rights under the distribution waterfall, the equity value of a portfolio needs to be run through the waterfall to determine the value split between each instrument and shareholding (e.g. to determine the value of what the fund holds versus the non-fund shareholders). This requires accurate ownership data at the valuation (or exit) date. In addition, coupon bearing strip equity instruments such as preference shares and loans require detailed interest schedules tracking each event to determine their value.
5. Data quality and availability
Most private equity funds and their portfolios do not have real time reliable ownership records available to them. At best, they have static records maintained in excel and other fragmented systems that come at a high time cost and are prone to error.
6. A single source of truth
Real time and reliable records require a single source of truth system that can digitise, administer, and validate private equity portfolio ownership structures and cap tables. Such a system will have the necessary intelligence, workflows, and access controls to help administer and validate these structures at both the fund and portfolio level.
DealsPlus helps private equity fund and portfolios digitise, administer, and validate ownership structures and cap tables. Our platform adds value across valuation, finance, tax, legal, and transaction workflows for both the fund and its portfolios.