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Samuel (Sam) W. Wales has a wide-ranging practice representing private equity funds and publicly traded and privately held companies, with an emphasis on mergers, acquisitions, divestitures, recapitalizations, joint ventures and the related financing required to fund such transactions. Read Sam Wales' full bio.

We are frequently asked about the differences between a traditional private equity fund, a search fund and a fundless sponsor.

Many investors are familiar with the traditional private equity model in which a fund raises a pool of committed private capital, which it has a right to call for future acquisitions.  That capital is then invested over a five- to seven-year horizon in multiple portfolio companies.  The goal of these traditional private equity funds is to return the capital to their investors with a significant return on investment.  In the traditional private equity scenario, limited partners are not allowed to pick and choose between portfolio investments, although there may be some opportunities for limited partners to make additional deal-by-deal co-investments.  Typically, private equity principals take on an advisory, non-operational role with their portfolio companies.

Search funds are specialized “micro” private equity funds that are formed generally by one or two individuals for the specific purpose of acquiring one target company that the principals of the search fund then operate.  Search fund principals initially raise “search capital” of approximately $500,000 that allows them a period of time – typically 18-24 months – in which to search for an acquisition target.  At the time the Search fund is ready to purchase a target company, it returns to its initial search-stage investors (and also to other equity investors) seeking the required equity contribution to complete the acquisition.  Search funds usually seek lower-middle market acquisition targets that fall below the radar of traditional private equity funds.  Search fund principals take on high-level day-to-day management positions within the acquired portfolio company, effectively running the business from and after the closing.  Search fund principals receive a salary from the portfolio company and also earn a carried interest on the equity investment that financed the acquisition.

Another variation on the private equity investment vehicle is a fundless sponsor.  As its name suggests, a fundless sponsor is a private equity professional or group that searches for acquisition targets first, then shops those acquisition targets to known sources of equity capital.  Many traditional private equity funds are willing to invest in transactions that are shown to them by fundless sponsors.  However, because private equity sponsors will often attempt to negotiate an economic split that is less favorable to the fundless sponsor, fundless sponsors many times aim to find sufficient sources of equity capital to prevent any one source from having significant negotiating leverage.  Fundless sponsors will sometimes maintain a role with the target company after the acquisition is consummated, often in the form of a board seat, but are usually not involved in the day-to-day operations to the same extent as search fund principals.

Private equity comes in many different forms and sizes, and with the growth of private capital, search funds and fundless sponsors are becoming more commonplace in the middle market today.

If you have questions about our search fund practice, please contact Sam Wales (+1 202 756 8126), Raam Jani (+1 312 984 7681) or Eric Moskowitz (+1 212 547 5858).

The Corporation Law Section of the Delaware State Bar Association has proposed legislation that will amend the General Corporation Law (DGCL) to allow public companies to opt out of the current requirement to obtain stockholder approval of the back-end merger following a successful tender offer in which the buyer has obtained a majority of the target company’s voting stock.  Traditionally, an accelerated back-end merger was only available if the buyer first obtained 90 percent ownership following a successful tender offer.  In situations where the buyer was unable to achieve this 90 percent threshold, the buyer was required to proceed with the formality of obtaining stockholder approval of the back-end merger, which required the preparation of a proxy statement that would be filed with, and subject to the comments of, the Securities Exchange Commission (SEC) before it could be mailed to the target company’s stockholders in advance of the stockholder meeting to approve the back-end merger.  In addition, if the buyer was using debt financing to acquire the target company’s stock, then this delay between the closing of the tender offer and the stockholder vote approving the back-end merger frequently required the buyer to obtain bridge financing.

Avoiding the cost and delay of such “long form” back-end mergers (and avoiding the need for bridge financing) caused buyers of public companies either (a) to shun the tender offer process entirely or (b) to utilize various tools in an attempt to avoid financing constraints or ensure a faster timetable, such as the use of top-op options, subsequent offer periods under Rule 14d-11, the “Burger King” dual track tender offer/proxy statement structure, stockholder action by written consent, and other creative alternatives.  However, if Delaware adopts proposed Section 251(h) to the DGCL as expected in August 2013, then buyers will be able to acquire Delaware public companies through a tender offer without the need for a “long form” back-end merger or  top-up options, subsequent offer periods or other alternatives.  Specifically, under proposed Section 251(h), a buyer would be able to acquire a Delaware public company (defined as a corporation whose shares are listed on a national securities exchange or held by more than 2,000 stockholders) through a tender offer without stockholder approval of the back-end merger, if the following requirements are satisfied:

  • the merger agreement must expressly state that the back-end merger is governed by Section 251(h) and will be consummated “as soon as practicable” following completion of the tender offer;
  • the buyer must initiate and consummate the tender offer for the target company’s shares otherwise entitled to approve the back-end merger;
  • after the consummation of the tender offer, the buyer must own at least the number of shares of the target company otherwise necessary under the DGCL to approve the back-end merger;
  • at the time the target company’s board approves the merger agreement, no party to the merger agreement is an “interested stockholder” of the target company pursuant to Section 203(c) of the DGCL;
  • the buyer must merge with or into the target company pursuant to the terms of the merger agreement; and
  • the buyer must pay the same consideration at the consummation of the back-end merger as it paid upon consummation of the tender offer.

We believe that this new Section 251(h) will allow buyers to realize the timetable and other benefits of tender offers and will significantly increase the frequency with which tender offers are  used to acquire Delaware public companies.