UK Private Equity Structures
Explanation
Private equity (PE) investors in the UK typically favour specific deal structures depending on whether they are on the buy-side or the sell-side. The structure chosen impacts negotiation dynamics, risk allocation, and the timing of fund distribution.
Sell-Side Preferences: The “Locked-Box” Model
On the sell-side, PE investors generally prefer the “locked-box” consideration structure. This model provides greater certainty and simplicity compared to traditional completion accounts structures.
Key benefits of the locked-box approach include:
• Fixed purchase price: Agreed based on a historical balance sheet date (“locked-box date”), reducing the scope for post-closing disputes.
• No post-closing adjustments: Eliminates the need for prolonged negotiations and allows funds to be distributed to investors (Limited Partners) immediately after closing.
• Investor returns optimised: Faster fund distribution supports internal rate of return (IRR) performance, a key metric for PE funds.
This structure is especially attractive to PE sellers who prioritise a clean and efficient exit.
Buy-Side Considerations: Exceptions to the Locked-Box Model
While buyers generally accept locked-box deals, there are situations where this structure may not be suitable:
• The target business is a carve-out from a larger company with no standalone accounts
• There are accounting or audit issues in the historical financials
• The risk profile of the target or seller makes a locked-box arrangement unsuitable
In such cases, buyers may prefer a completion accounts structure. This model allows for a post-closing adjustment to the purchase price based on actual financial performance up to completion.
To protect buyers under the completion accounts method, it is common to place a portion of the purchase price into escrow at closing. This escrow serves as a reserve in case a payment adjustment is required.
Buy-Side Structures: Deferred and Earn-Out Payments
In primary transactions (where a PE firm is acquiring from a founder, family, or non-PE owner), it’s common to include deferred consideration components.
A typical example is an earn-out, where part of the purchase price is linked to the future performance of the business. This is usually measured using clear financial criteria—such as revenue or EBITDA—over a defined time period.
Earn-outs are particularly useful when:
• The seller remains involved in the business post-transaction
• There is uncertainty about future growth
• The buyer wants to align incentives and reduce upfront risk
By understanding these structures, both buyers and sellers in private equity can navigate deal negotiations more effectively—balancing certainty, risk, and financial outcomes.
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The Origins and Evolution of Private Equity
Private equity (PE) has grown into a global financial powerhouse, but its beginnings can be traced back to the post-World War II era. The formation of the American Research and Development Corporation (ARDC) in 1946 marked one of the earliest institutional private equity efforts.
ARDC’s mission was to fund companies that could repurpose wartime technologies for commercial use. One of its landmark investments was in Digital Equipment Corporation (DEC). A modest $70,000 investment in DEC eventually turned into $355 million, delivering a return of over 5,000 times the original amount. This staggering success demonstrated the potential of private equity to fuel innovation and drive extraordinary financial outcomes.
The Rise of Leveraged Buyouts in the 1980s
The 1980s became a transformative decade for private equity, largely due to the emergence of leveraged buyouts (LBOs). Pioneering firms such as Kohlberg Kravis Roberts (KKR) led this movement, acquiring companies primarily through borrowed capital, implementing operational improvements, and exiting through strategic sales or IPOs. These deals often resulted in significant returns and played a key role in legitimizing private equity as a powerful tool for value creation.
Private Equity Today: A Global Asset Class
Fast-forward to today, and private equity has evolved into a multi-trillion-dollar global industry. PE firms are actively involved in reshaping key sectors, including technology, healthcare, financial services, energy, and consumer goods. The United States continues to dominate the market, but institutional investors are increasingly turning their attention to opportunities in Europe and Asia where valuations are more attractive and growth potential remains robust.
In recent years, PE has also embraced thematic and impact investing. Many funds are aligning their strategies with ESG (Environmental, Social, and Governance) principles or specific global trends, such as digital transformation, renewable energy, and health innovation. This not only broadens investor appeal but also enhances the sector’s influence on global progress.
The Dominance of Private Companies
One compelling statistic underscores the importance of private markets: approximately 83% of U.S. companies with over $100 million in revenue remain privately held. This highlights the vital role of private equity in financing, developing, and scaling enterprises outside the public markets.
In summary, private equity has evolved from a niche investment strategy to a dominant force in global finance. With its origins in innovation and a future driven by strategic investment, operational excellence, and global diversification, PE is positioned to remain a key player in shaping tomorrow’s economy.
