Where’s my exit? Incentivising management on long term investments



Infrastructure investors are typically in for the long haul - their investment horizons typically span 25 years or more. Historically, management teams of infrastructure groups have been incentivised through the use of conventional bonuses. However, many have become wise to the high returns from sweet equity plans that have been offered on traditional private equity backed deals and are requesting they receive something similar. In contrast to the long holding periods of infrastructure investors, management teams will want a visible exit event, typically within 5 years. Aligning these differing investment horizons is not easy.


Aligning objectives

To address these conflicting objectives, it may be necessary for a 'synthetic’ exit to be accommodated. This means that if an exit event isn't achieved in 5 years, the management team still receives a return as if a trade sale or other liquidity event had occurred. Returns under a 'synthetic' exit could be based on the improvement in the business in the prior 5 year period with the option for management teams to rollover into the next 5 year incentive plan. The returns to a management team may not necessarily require funding by the investors and instead, use existing cash generated in the business.


Why is this important?

A well framed management incentivisation plan is a great way of aligning investors and the management team’s goals and can often be the difference between a successful buyout or not.

If the investor is to accommodate a 'synthetic’ exit, there are a number of commercial, tax and legal complexities to address for both the management team and the investor. Valuations will also be key to ensure the 'right' price is paid at the time of a future exit.

In an increasingly sophisticated management / infrastructure advisory market, it is often commonplace for management teams to have their own independent set of advisors and expert advocates on both sides of the deal can become a necessity.


Feel free to get in touch if you’d like to discuss how best to incentivise your portfolio company management teams or any other topics we’ve raised here.

Tom Klouda | Senior Manager, Private Equity and M&A Tax
Profile | Email | +44 (0)20 7804 1940


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Bhavik Desai | Senior Manager, M&A Tax
Profile | Email | +44 (0)20 7212 4469


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