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Control and Navigating Deals with McGuireWoods’ Anne Croteau and Alex Horn
Episode 87th March 2022 • Deal-by-Deal: An Independent Sponsor Podcast • McGuireWoods
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There’s a lot that companies need to consider when deciding to pursue independent financial backing. 

The decisions companies make when striking deals almost always come back to control — a factor that has a significant impact on the future of the company. Depending on how much control the backer negotiates, different scenarios could lead to backers gaining significant veto rights, board control, or a total loss of management fees.

The process is complex and involves many moving pieces. That’s why we brought Alexander Horn and Anne Croteau — seasoned independent sponsor deal negotiators — on today’s episode of the podcast.

“A financial investor is going to want to have some control over any big corporate decision above a certain monetary threshold. [But] they don't want to get into the day-to-day and they don't want to get into the nitty-gritty … that's not their focus. It takes them away from their main focus, which is finding additional investment,” says Anne. 

On this week’s episode of Deal-by-Deal, Anne and Alex walk us through what considerations should be made when discussing independent sponsor deals and what’s at stake.

Featured Guests

Name: Alex Horn

Title: Partner at McGuireWoods

Specialty: Alex is focused on private equity and other finance transactions. In the past, he has represented business development companies (BDCs), small business investment companies (SBICs), and other private debt funds.

Connect: LinkedIn 


Name: Anne Croteau

Title: Partner at McGuireWoods

Specialty: Anne is focused on private equity and other financing transactions, mergers and acquisitions, and general corporate matters. She has represented lenders in first lien, unitranche, second lien and mezzanine credit facilities, equity co-investments, and kickers. She has experience advising on intercreditor relationships, capital structures, and complex restructurings.

Connect: LinkedIn


Acquired Knowledge

Top takeaways from this episode 

★    Negotiations are all about control. Different types of partners will have different outcomes and control issues: a family office might offer pure equity while a lender like a small business investment company will instead require significant equity backing. The type of partner will determine the level of control it has over your company: for example, large-scale and influential financial backers are likely to require significant control of your board as well as asking for veto rights and involvement in major financial decisions.

★    Corporate sponsors generally don’t want to be involved in management. While corporate sponsors might have a significant amount of control, they don't want to be involved in the daily details. An independent sponsor’s main job is to find good investments.

★    Consider the interests of every financial backer. Dealing with equity backers and debt financial backers could result in conflicts of interest if the interests of all parties are not taken into consideration when these deals are initially made. In some cases, management fees could be lost or a debt could go into default.


Episode Insights

[00:29] Meet our guests: Anne and Alex, longtime partners at McGuireWoods, join us on the podcast to discuss a topic that comes up in every deal: determining fair distribution of control between independent sponsors and capital providers.The issue was a recent point of discussion at the 2022 McGuireWoods Independent Sponsor Conference.

[01:40] The basics: Anne and Alex explain the two typical kinds of partners involved in independent sponsor deals. Each comes with its own unique control issues.

[03:13] The desire for control: Anne explains when independent sponsors will expect significant control of a company, particularly when making sizable investments.

[05:50] Veto rights: How should independent sponsors think about and negotiate veto rights with sponsored parties? Can different circumstances call for different veto rights? What’s the proper scope?

[08:53] Board takeovers: It’s possible for financial backers to take over the board of the company they are supporting, but it doesn’t happen right away. So what triggers takeovers? And what should sponsors keep in mind when negotiating these types of provisions?

[14:28] When both parties agree: It is possible for board takeovers to be a mutually agreed upon decision. Anne’s seen this particularly in lower to middle market companies.

[17:27] Backer involvement: Corporate sponsors don’t always want to have deep involvement in the management of a company. Ann and Alex explain why.

[21:56] Management fees can be fragile: If independent sponsors lose control, management fees can be significantly reduced or completely shut off. Alex and Anne explain what kind of financial impact they can have and what companies should consider when drawing up a loan agreement.

[29:06] Regaining control: Can independent sponsors get control back after losing it? Under what conditions is that possible? Anne has been asking herself these questions amid some recent cases. She tells us why the loss of control is often a “one-way switch.”

[33:14] Connect with us online: To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website.


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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

Transcripts

Voiceover (:

You are listening to Deal-by-Deal, a McGuireWoods Independent Sponsor podcast. Deal-by-Deal invites you to conversations with experienced independent sponsors and other private equity professionals. Join McGuireWoods partners Greg Hawver, Jeff Brooker, and Rebecca Brophy as they explore middle market private equity M&A to provide you with timely insights and relevant takeaways.

Jeff Brooker (:

Hi, this is Jeff Brooker. Welcome to Deal-by-Deal, a McGuireWoods Independent Sponsor podcast. With us today, we have private equity partners in our Raleigh office, Anne Croteau and Alex Horn. Anne had given, back in October at the McGuireWoods Independent Sponsor Conference, a discussion on control between independent sponsors and their capital providers. And it's an interesting topic, one that comes up in every deal, and it's important and we thought warranted further discussion. Anne and Alex have pretty extensive experience navigating a variety of scenarios with various capital providers and so we thought a podcast episode with their insights would be interesting for folks. So with that, I will hand it off to Anne and Alex.

Anne Croteau (:

Thanks, Jeff. It's a pleasure to be here and talking to everybody. Always appreciate everything you and the rest of the firm do for the Independent Sponsor Conference. It gives the firm a great name. I can't tell you how important it is to a bunch of clients, including our finance clients. So we've worked a lot over the last decade with a number of independent sponsors and a lot of their financing partners. And I think, as you think about setting up these independent sponsor deals and the acquisitions that they're bringing to the table, to the extent they don't have the full financial equity backing to complete the deal themselves and they're looking for partners, there are two sets of partners we tend to see. One is maybe a family office that is going to be pure equity, and that creates a certain type of potential rights and control positions.

Anne Croteau (:

And then the other situation we tend to see is you've got a lender, often a small business investment or an SBIC that is also doing a significant equity backing, not always an SBIC, but that you've got also a lend for the table. And so those create two different situations for potential control issues for the independent sponsor. I think a lot of times the family office or the pure equity co-investor may be looking for some more control out of the gate. The SBIC or another lender with a significant equity co-invest would tend to also have a secured loan, even if in a mezzanine or subordinated second lien position that would protect their investment and that gives them some different rights. But there are a couple different ways that we tend to see these control rights cut. And sometimes it comes down to the amount of the financial backing from somebody else.

Anne Croteau (:

If the independent sponsor's putting up, call it, I don't know, 15, 20%, even the typical equity sponsor's only putting up 30% of the total cap stack. If the independent sponsor is able to write a significant equity check, we will often see them take control right out of the gate and have a lot of control going forward. To the extent it is more of a typical IS model where they're putting up there in the middle of the initial equity check and taking a carry and a management fee, that can go a couple different ways. If that independent sponsor has a significant track record or significant equity, or excuse me, industry experience, they can often command more control out of the gate because they're going to know how to run this company better than basically anybody else, in all likelihood.

Anne Croteau (:

To the extent they don't bring those things to the table, we will often see board control out of the gate in control of the real financial backers with a significant role for the independent sponsor, but board control with the other equity folks. When the independent sponsor does have significant industry experience or financial wherewithal, they might retain board control right out of the gate and the financial backer would have significant veto rights over significant incurrences of indebtedness, acquisition, any big company changes with the right to potentially to take control in a downside scenario. So that's a very, very quick and dirty, but kind of a quick guideline to the general rules that we're seeing in the market.

Alex Horn (:

And I would just say, building off of kind of the second example Anne was talking about, where there's an SBIC or another debt provider who's also writing a significant equity check, I think typically if it's a significant amount of equity, they're going to look for a board seat, but they may not have control over the board. And certainly, as Anne alluded to earlier, just given the role as a secured lender, they obviously have kind of a hammer of the secured lender remedies, if things really go sideways. So they're kind of thinking with both hats in that scenario. And to the extent that there isn't a significant equity check, a lot of times those SBICs are really just looking for a board observer right, where they're attending meetings, but not having a vote on formal board matters.

Jeff Brooker (:

This is Jeff. You had mentioned the financing party when they don't have board control would expect some veto rights. How should independent sponsors think about what those veto rights would be? What's the proper scope? Is it different in different circumstances?

Anne Croteau (:

That's a great question. I think that there is a general kind of ballpark in which they run that basically any big corporate decision above a certain monetary threshold, that financial investor is going to want to have some control over. They don't want to get into the day-to-day, they don't want to get into the nitty-gritty. Most financial investors don't want to have to actually be involved in the day-to-day; that's not their job, that's not their focus. It takes them away from their main focus, which is finding additional investments.

Anne Croteau (:

So I think you can talk about fairly high thresholds. It depends, if you've got a... Call it, this is a three to $5 million EBITDA acquisition, maybe platform acquisition, maybe even higher. If the company is looking to do add-on acquisitions above $1,000,000 from there for debt incurrences out of... There's probably going to be some indebtedness incurred in the initial platform acquisition. And if they want to do something further, again in excess of... It depends on the E size, EBITDA, of the company, but it's going to be gauged from there. Could be from 500,000 to one million to two million. It's really outsize decisions. Part of the reason that the financial investor is backing this independent sponsor is they don't want to run the company.

Anne Croteau (:

So as long as the independent sponsor is running the company appropriately, but there are some hurdles about CapEx, and this goes back to what Alex mentioned. When you have a situation where your financial investor is also a debt investor, that's going to be very significantly policed by their debt documents. And so they're not going to need the same veto right. I've also seen different sets of veto rights depending on how the company is performing, which again kind of aligns with the idea of a credit facility.

Alex Horn (:

Yeah. And a lot of those rights are really going to overlap with what's in the loan agreement already, to the extent that there's an SBIC fund providing both debt and equity. And so I think things like incurrence of indebtedness or significant asset sales or acquisitions are all typically going to be governed by that loan agreement. So there's some overlap there, but a lot of times those folks want to protect themselves in the event, obviously, that gets refinanced and that they're kind of stuck just in an equity position. So they still want a seat at the table when it comes to those bigger corporate decisions, even if their debt is gone.

Jeff Brooker (:

Got it. And then you'd also mentioned that sometimes there would be a board takeover provision. And so, if the independent sponsor wasn't properly running the company, then the financial backer would be able to step in and take board control. What do you typically see as those triggers? I know that very important to think about for the independent sponsor, what are the appropriate time for the financial partner to be able to take over? Because that's an important inflection point where they could potentially lose control of their deal and potentially lose a little bit of credibility and reputation for anyone who finds out about that. So what are the hot buttons and the things to think about when an independent sponsor is, or a capital provider is negotiating those revisions?

Anne Croteau (:

Yeah. There's the big issues, right? If there is any sort of insolvency threat or bankruptcy, that's kind of the DEFCON provision. But a lot of times they'll have it keyed to certain financial performance. And this gets also again into a crossover a little bit with a credit facility. So even if the financial backer does not have a credit facility, if the company is getting too upside down on its credit, in terms of its leverage, the leverage ratio of how much debt it has to it earnings, and that could be the result of an increase either in the debt or often a non-performance and slide back in the earnings. If they're getting upside down on that, they're not able to meet their general coverage, any sort of fixed charge coverage.

Anne Croteau (:

They're not able to meet their obligations as they come due on a regular basis with sufficient cushion. And usually there is a period of several quarters where that would not be back. So it's not necessarily yanking control immediately, but if you're establishing over a period of two to three fiscal quarters that the company is backsliding, that is frequently a time when the financial backer might be able to take board control. I've seen this actually... Go ahead, please, Jeff.

Jeff Brooker (:

Sorry. Yeah, Anne, just on that point, are you talking about sort of in the documents governing the equity piece of the investment in those scenarios?

Anne Croteau (:

That's right. Yeah, exactly. Even if you've got somebody who does not have any debt investments, so who would not be relying on any credit facility, I have often seen some sort of a marker that is very similar to what you would see in a credit facility. Because really what you're trying to capture, by and large, is any sort of investor at a certain point, depending on how much you have invested, is how is the company performing? Is there a point at which I don't think this company is performing and I'm concerned about the situation such that I want to take control and change management? Or do something, and a lot of times the financial investor is not necessarily going to take control themselves as opposed to have the right to potentially replace the CEO, the management, cut off management fees.

Anne Croteau (:

Again, this playbook, I know I sound repetitive. So the playbook even from an equity financial backer in the situation and so it's very much like a debt financial backer. But the other interesting thing is it can flip back too. You can almost see the dual flip. So for instance, we're working with a company, I'm actually in the process of selling a company right now that was a 2012 platform. Independent sponsor, very, very, very knowledgeable in the environmental services industry. Sponsor had been at Chase Capital Partners for years, developed an industry expertise, went out on their own and had a deal that just had... This was two SBICs, actually, financial backers, both in terms of debt and equity, but the industry just went a little sideways, some of the things they did, they did some add-on acquisitions that just didn't pan out.

Anne Croteau (:

It was not helpful. There was a point at which the senior lender, this is back in 2016, so four years after the platform acquisition, the senior bank lender at that point was agitating to get out. They didn't like the deal anymore. They didn't like the balance sheet. So the two SBICs who were providing second lien financing, as well as a significant amount of the equity financing, they converted a significant amount of their debt to equity. And that has its own considerations, but we don't have to go into that here, different podcast. And the company struggled for a couple years, but has been on a fast track since 2019, has been very, very lucrative contracts that have taken it from basically two to three million of EBITDA to, in the past year, seven million of EBITDA and is now being sold, and the independent sponsor has ties to a lot of prospective buyers and is incredibly valuable.

Anne Croteau (:

So they basically renegotiated the right to get certain management fees and an investment banking fee in lieu of an investment banker if they don't have to go to an investment banker for the sale. And it's been very cooperative. That's the other thing about, honestly, at least in the lower middle market, there are a lot of times these things are cooperative and not super-contentious. This independent sponsor shut off, was willing to shut off their management fee for a period of a year or two while the company was recovering. They understood the situation and they're now looking to kind of recapitalize on that. So there's been a kind of shifting of control back and forth, if you will.

Jeff Brooker (:

Anne, on that one, can you remind me, did the lenders have a significant equity co-invest before the downturn for the company?

Anne Croteau (:

They did. Yeah, they did. And that's a good question. They did have a significant equity co-invest, but it was not control until they converted some of their debt equity.

Jeff Brooker (:

Right.

Anne Croteau (:

Even at the point they took control, it was always very consensual with the independent sponsor, because I think as knowledgeable as at least one of the equity backers was in the industry, it was really the independent sponsor who had such significant understanding of the industry and the players in the industry and was clearly doing the right thing by working to replace management, get the right people in place, doing the smart thing with the company after a couple backslides, that that reestablished the independent sponsor, who clearly... I'm not sure reestablished is the right word. Potentially it was just reiterated that despite some bad decisions or some unfortunate decisions, this was an independent sponsor who knew how to run this company, who knew the industry, and that may be a very different situation from somebody who doesn't have that track record and experience.

Jeff Brooker (:

And I think it seems to be a pretty good example of one of the reasons why independent sponsors often prefer those capital providers that have the ability to do both that and equity, because they are still thinking with their equity hats on when things go south, right?

Anne Croteau (:

No, I think that's right. I think that's right. Look, there are lots of different providers that bring a lot of different pluses and minuses to the table, but for sure, when you have somebody that's willing to plug in, has the wherewithal to plug in things at different levels of the balance sheet, but is also thinking, and these folks clearly are, in terms of their equity recovery, that provides some flexibility to the independent sponsor and to the company in terms of its growth and liquidity going forward.

Alex Horn (:

Yeah. And just kind of backing up to some of the triggers that are out there for control, obviously going back to the secure lender remedies, technically most loan documents are going to provide that if there's any event of default, be it financial covenant default, or payment default, or any of those items, that they technically have the right to step in and exercise their right to lower the equity and exercise control over the company. But we typically don't see that happening right away. People are not usually very quick on the trigger. That is sort of a last ditch effort if other kind of workout or restructurings aren't working over the course of several quarters or a year or more.

Alex Horn (:

And I would also add, in that case, a lot of lenders are really pretty hesitant unless they already have a board seat or they have some other significant equity stake in the company they're pretty hesitant to go that route and to take on the fiduciary duties that come with running a company. So it really depends on the lenders incentives and their appetite and their expertise at actually running an operating business, and not all of them have the stomach to do that.

Anne Croteau (:

Yeah. I think that's a great point. I think they don't have the stomach to do that. A lot of them are not built for that. I was talking to a direct lender the other day who said they don't do a lot of equity co-invests and they don't do a lot of riskier kind of deals where they would have to be in any sort of a workout. In the lender world, we joke about that as being the 80/20 rule, where 20% of your portfolio is going to take 80% of your time. And it probably holds true for a lot of family offices or other equity providers, sole equity providers, that depending on the amount of the stake that they have in the company, it may not be worth their while to actually spend a lot of time trying to rehabilitate a company.

Anne Croteau (:

And so that's one of the reasons, maybe in large part maybe the independent sponsor role has grown so substantially because you've got a lot of people running around with money but not time, or have other things that they're focused on. And I think that holds true in terms of the original investment, as well as when things go wrong. But another quick example of what we've seen is where there were two also SBIC investors, but doing a substantial equity investment, so basically, half of their investment was in the equity, not the debt, backing an independent sponsor who had industry experience. The company kind of floundered off and on for a period of time and I think they were prepping the company for a sale back in as early as 2018. 2019, COVID hit. It affected the company drastically, and people kind of let it work itself out and the sponsor was very involved in working itself out.

Anne Croteau (:

But once the company started recovering, I got to tell you, the two financial backers kind of swooped in and started to take control of the destiny of the company, because at that point also, and this is also a potential consideration that the independent sponsor has, particularly depending on the type of financial backer it's working with, certain family offices probably have a longer run rate in which they're willing to have their money deployed. They may not be on the five year turnaround, they may have a little bit of a longer leash, but this was a 2014 platform and the funds were looking to wind down. This was one of their last investments. And they were ultimately willing to sell for far less on 12/31 of last year than they really probably would've commanded even six months into this year. And so they had a little bit of a time getting management on board, but they swooped. Basically, that was a situation where they swooped in to make sure that this sale got done, because they were getting to wind down their funds.

Alex Horn (:

And that deal was certainly kind of long in the tooth in the private equity world. But it actually raised an interesting question, which is whether independent sponsors should consider what's the fund life for their backers if they're going to get into a transaction where they really need to kind of prove themselves within a shorter period of time, or if they're going to have the runway that they need to actually kind of prove out the story.

Jeff Brooker (:

I'm not sure that I've heard anyone do that, at least in a way that they've discussed it with me. But hopefully they're doing that in the background. I wanted to jump on one of the things in what you had said that I thought was really interesting and worth elaborating on. You'd mentioned that when one of the independent sponsors had lost control, that their management fee was shut off. And so I think one of the really interesting things and worth thinking about here is what is the impact if when the independent sponsor loses control, if they had control in the first place, what is the impact on their economics? I can tell you that what I've typically seen is it has no effect on the closing fee or the carry, but that yes, the management fee will be either reduced or completely shut off. Hand the floor to you, to Anne and Alex. What do you typically see, and what should folks be thinking about with respect to that?

Anne Croteau (:

Alex, do you want to talk about it from at least the kind of [crosstalk 00:22:48] backside? Yeah.

Alex Horn (:

Yeah. And this is another one where there may be some overlap between the debt and the equity considerations, but I think typically the loan agreement is going to have conditions around when that management fee is going to be able to be paid and typically that would include financial covenant compliance. And so to the extent that the company's not performing and not meeting the financial covenants and kind of performing to the model, that management fee can be shut off at any time by the lenders. And I think it's interesting because it sort of depends how bad the performance is. I think if folks are quick to shut that management fee off, that may be okay if there's a reasonable prospect of a turnaround in the short term, but I think it gets tougher because for a lot of independent sponsors, that's really a huge part of their economics.

Alex Horn (:

And so if they see that the value of the company is deteriorating rapidly and their carry's kind of going away, because there's not going to be a recovery for them, that their step in the waterfall, and they're not getting paid a management fee, then it may be difficult to keep the independent sponsor engaged. They may be kind of looking for the next opportunity if they're not getting that management fee and the carry is looking less and less likely to be in the money.

Anne Croteau (:

Yeah, no, I think that's exactly right. Because it also, that management fee generally covers their ongoing... It can be a little bit of a goose, but it also covers their ongoing expenses to the extent they have any staff that is assisting with the administration of this portfolio company. I know in this one example I'm working on right now, there's been a significant amount of time spent preparing this company for sale and talking to a number of different buyers. Think about the investment banking fee you would have. And so, this independent sponsor did negotiate a separate transaction fee to be engaged as banker, essentially for this sale, but they were still entitled to a quarterly management fee that would be what was going to be turned on when the senior leverage hit a certain threshold, meaning there was not so much senior debt on the company, but it also required the consent of the sub-debtholders who were also now some of the main equity holders.

Anne Croteau (:

And I think there had been, there was just correspondence on this literally several days ago that there was an idea that the independent sponsor thought they had earned their quarterly management fee for the fourth quarter of last year and certainly the beginning of this quarter. And there was some question about whether that was the case. And the independent sponsor had just agreed to serve, at the request of everyone else, as the seller representative for the sale of the company in the deal being negotiated right now, which of course takes some time and effort. Even if there's no indemnification claim you still got purchase price, adjustment, net worth and capital, workout matters, as well as any potential dispute.

Anne Croteau (:

You have the wind down of various entities and the final K-1s and all those types of things. And there was a question whether everyone was going to allow their management fee to be paid, and the independent sponsor said, "Okay, that's fine. That's your choice, but then why doesn't one of you serve as a seller rep?" And so that was actually the outcome. It was not acrimonious, it was nothing, it was not an issue. But it is a big deal. These are considerations, especially from an equity holder standpoint. So this could be really interesting when you've got an equity backer that is different than the debt financial backers. And whether you have potential conflict of interest where the debt providers, to Alex's point, are going to shut off that management fee, it's very standard and accepted totally across the lower middle market that that management fee gets shut off in a default on the debt or perform a default on the debt.

Anne Croteau (:

And the equity backer may actually want that management fee to continue because even though that also comes out of their own pocket to some extent, they're banking on, especially if they don't have any debt, they're really banking on this independent sponsor to grow their equity investment. And so one of the key issues in any downside scenario involving an independent sponsor is how do you protect the economics of every financial backer, but yet to the extent valuable, keep the independent sponsor engaged and incentivized? And so a lot of times we'll see agreements that even if their management fee is set off, it certainly comes back in their catch up. They're always even under debt documents, their catch up rights that if the company starts to perform again, they get caught up over time.

Anne Croteau (:

But we'll see the idea of success fees, that if they can get the company back to X level of EBITDA or something like that, they're going to get a success fee, because it becomes a significant tension between making sure there's not undue cash leakage, but who's in the best position to drive this company forward to success? And that depends on all the parties involved.

Jeff Brooker (:

Yeah, you actually anticipated kind of the next thought of where I had some questions, is how do things turn back to normal, if they turn back to normal? And you talked a little bit about turning the management feedback on, or ways to keep the independent sponsor engaged or incented. What have you seen when the independent sponsor loses control, or the documents provide for them to have a loss of control upon certain triggers? Are they able to get control back? Are you seeing that, or are you seeing it as a one-way switch where at that point it's up to the financial backer if and under what conditions they want to hand the keys back to the independent sponsor?

Anne Croteau (:

So that's a question that I've actually started asking myself and that came to my focus just in actually reviewing some situations and documents for this podcast. Because I will say that I most typically see a one-way switch, apart from the example I just gave about under debt documents the management fees can get shut off and subordinated under certain circumstances, but there are catch possibilities. But a lot of the board's kind of flip positions, or provisions, I see are more of a one-way switch. In part, I think, because they only come into play when you've really reached a really difficult situation, a significantly difficult situation.

Anne Croteau (:

It's not just that the company's not performing for a quarter or two and the lenders are trying to shut off the management fee just to cordon down all cash leakage. Usually, when you have a separate board flip in a document related to equity ownership only, that is, it is really some of the biggest things that there's not... To the extent it was supposed to be any current payment on an equity interest, its tax distributions are not being paid, there's a bankruptcy threat, there's a bankruptcy filing. So you've got significant financial issues established over... Either based on significant misses of financial hurdles or over significant quarters of time, as opposed to... Not that any event of default under a credit facility comes quick and easy, but we're not talking about the bare minimum event to default.

Anne Croteau (:

What we don't tend to see is that natural flip back, at least under the documentation, that if the company does X, Y, Z, you're going to flip back into this. It's not unheard of, we just don't tend to see that. I think where it comes up more frequently is practicality. If the company actually starts performing significantly, I think there's just a practical switch back to what makes sense for everybody's alignment.

Jeff Brooker (:

Yeah. So between the two examples you've been talking about, there's the one that's kind of the turnaround success story, where the independent sponsor's serving effectively as an investment banker, and then there's the other one where the company was sold and there was a little bit of a turnaround story, but perhaps not maximizing the value or getting back to where they thought it should be. And in the first one, because the practicality that you're talking about, it seems like they were willing to compensate and incentivize the independent sponsor because there was a good turnaround story. But in the other example, the switch was a one-way switch, right? Those folks didn't kind of recover their economics at that point.

Alex Horn (:

Yeah. The one-way switch is consistent with what I've seen, where it doesn't just flip back. The understanding is that the financial backer may, at some point, give them their control back, but it's the financial backer's decision under what conditions and when. And so that's to make sure that they're entirely comfortable, that they want to, and that the time is right, and the condition's right to do that. That's always what I've seen. I've never seen if you check these objective boxes that the control always flips back. So I think that [crosstalk 00:32:56]

Anne Croteau (:

Because basically at the time that you reached enough issues that you flipped the board, if you flipped control, things have gone poorly enough that at that point everyone's in uncharted waters and you're just going to kind of basically take it one day at a time.

Alex Horn (:

Yeah. The relationship is likely to be tense at that point, tense to say the least.

Jeff Brooker (:

Thank you very much, Anne and Alex. I think this has been a really great, informative discussion. You clearly have a lot of experience navigating these issues and have thought a lot about them. So really appreciate you coming on and sharing those insights.

Alex Horn (:

Thanks, Jeff. It's been fun having this discussion, and yeah, folks can obviously find us on the web, and happy to have any follow up discussions with any listeners out there.

Anne Croteau (:

Thanks so much, Jeff.

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Thank you for joining us on this episode of Deal-by-Deal, a McGuireWoods Independent Sponsor podcast. To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website at mcguirewoods.com. We look forward to hearing from you. This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in the podcast.

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The views, information or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.

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