Goodwin survey finds equity rollover pool size declines

The size of equity rollover pools held by management teams in private equity deals has fallen slightly over the past two years, according to a new survey by Boston law firm Goodwin Procter.

The 2015 survey, titled “Rollover and Incentive Equity Terms in Middle Market Private Equity”, involved more than 60 general partners (GPs) that were polled on rollovers and incentive equity practices in middle market buyouts. It found the average size of management equity incentive pools fell to 11.4 percent this year from 12.6 percent in 2013 when the law firm held its initial survey on the topic.

Goodwin Procter's survey also found that 93.1 percent of respondents believed the determining factor behind the size of a rollover stake was directly tied to aligning the interests of owner stakeholders by giving them “skin in the game” alongside GPs. 

In a majority of the respondents' transactions, rollover securities were fully vested with the average size of pre-transaction stakes in portfolio companies ranging from 16.8 percent to nearly 28.5 percent (GPs required minimum rollovers of 18.2 percent), according to survey respondents.

The average time period for vesting of equity incentive pools totalled 4.6 years. 

Not surprisingly, given the strong emphasis private equity managers are placing on the alignment of interests, a large number of deals involved the transfer of existing management team equity interests to be carried forward into a new portfolio company post transaction. The poll found that 70.7 percent of GPs required management or founder stakeholders to rollover stock.

When it came to management or founder owners carrying their equity stakes over following a new transaction, deals with equity investments of $100 million or less commanded a minimum rollover of 19.3 percent, as compared with deals in the $100 million to $500 million range, which drew a minimum of 20.1 percent. Transactions with equity of $500 million or more required a 14 percent minimum, according to the survey.

Management equity incentive pools most commonly involve a blend of performance vesting and time-based vesting with the average period being 4.6 years.

Goodwin Procter's survey noted that the use of ancillary rollover rights, such as bonus payments and options, varied widely among respondents. Interestingly, the poll noted that GPs are increasingly using tax advantaged profit interests in lieu of options when it came to rollovers.