Monthly Archives: October 2017

When purchasing a company, private equity sponsors typically use a combination of debt and equity to fund the purchase price. When structuring a transaction, private equity sponsors may invest all or a portion of their equity capital in the form of preferred stock or issue preferred stock to minority investors if sufficient debt is not available. Similarly, a company may, from time to time, issue one or more series of preferred stock to raise necessary operating capital when debt financing is only available on restrictive terms or not available at all.

This post explores such uses of preferred stock in private equity transactions, with a particular focus on its use in minority investments, including as an alternative or supplement to debt financing, and will analyze the relative benefits and drawbacks of utilizing preferred stock in this context from the perspective of both the issuing company (which also may be controlled by a private equity sponsor) and the private equity minority investor. Relatedly, it will address how, in the context of financing an acquisition, a private equity sponsor may allocate financing risk and the risk of an acquisition not being consummated with its minority preferred investors, including in connection with commitment letters, guarantees, and termination fees.

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