Smaller Private Equity Investments Don’t Necessarily Mean Lesser Control

Recent trends reveal that private equity firms are increasingly taking minority stakes in companies, as opposed to acquiring majority stakes due to rising interest rates. This trend could have significant implications for the M&A market, as private equity firms may be less likely to fully acquire companies if they can only take minority stakes.

As interest rates rise, borrowing becomes more expensive, which can make it harder for private equity firms to finance large acquisitions. In response, some firms are opting to take smaller, minority stakes in companies instead of fully acquiring them. This allows them to still participate in potential profits while minimizing their risk and the amount of capital they need to invest.

While the trend towards minority stakes could lead to less overall M&A activity, private equity firms will typically negotiate strong negative control rights as part of their investments. Negative control rights can take many forms, including the ability to veto certain decisions or appoint members to the board of directors. These rights allow private equity firms to protect their investments and ensure that the companies are being managed in a way that aligns with their goals.

Private equity firms may also negotiate options to increase their stakes or force buybacks if the investments perform well. This allows them to potentially increase their ownership and profits if the company is successful, while also providing an exit strategy if the investment does not perform as expected, overall, the trend toward private equity firms taking minority stakes in investments due to rising interest rates could have both positive and negative impacts on the M&A market.

Overall, the trend toward private equity firms taking minority stakes in investments due to rising interest rates could have both positive and negative impacts on the M&A market. It is important for companies to carefully consider the terms of any agreements and the potential consequences of granting these rights. Negative control rights can give private equity firms significant influence over the direction of a company, and it is important to ensure that the interests of all stakeholders are taken into account.