Bigger Indemnity In Growth Equity Deals, Study Reveals

Indemnity provisions are written into deals to establish rules between investors and sellers if undisclosed problems are discovered after closing — not unlike a limited warranty entitling buyers to get all or part of their money back if a product they buy fails to measure up as billed.

While ample precedents exist for venture capital investments and traditional buyouts, growth equity transactions, which typically include the sale of a minority stake in a company, offer fewer data points for crafting deals.

Moving to meet strong interest from sponsors and private companies in growth equity, Goodwin Procter’s study focused on providing information on indemnity clauses and other aspects of the subsector of private equity.

“Growth equity deals have been less efficient because of a lack of standard terms for indemnity agreements,” Goodwin Procter partner Michael Kendall said in a phone interview with Buyouts.

One stumbling block has been deciding what percentage of the buyer’s investment to pay back in case an indemnification clause is triggered, he said.

Among the key findings of the study, which included 48 U.S. and 18 foreign targets, 69 percent of growth equity transactions included an indemnification cap of greater than 15 percent of the investment amounts and 36 percent of deals had a cap equal to the full investment amount.

By contrast, a 2011 study of acquisitions of private companies in the U.S. by the American Bar Association showed 27 percent with indemnification caps in excess of 15 percent of the purchase price, with 9 percent having a cap equal to the purchase price.

Other findings include:

• The mean equity value of the target in growth equity deals came in at $1.75 billion and the median totaled $181 million.
• The mean investment amount was $86 million and the median investment amount was $36 million.
• In deals in which all of the proceeds were received by shareholders, 86 percent of the time the shareholders were responsible for the indemnity either exclusively—57 percent of the time—or together with the company—29 percent.

John LeClaire, a partner with Goodwin Procter, said the study appears to be the first reporting on key terms of minority-stake, growth equity deals.