Financial sponsors now form the majority of potential bidders in most auction transactions. In terms of completed transactions, according to data from Mergermarket, of the buyout transactions that closed in 2024 and 2025, 21% involved a financial sponsor (this is not including transactions where the buyer (or seller) is a portfolio company and which would significantly increase the proportion of transactions with direct or indirect financial sponsor involvement).

A financial sponsor Seller will be keen to achieve a clean exit. Unlike a trade Seller, which will retain its core businesses and associated personnel, a sponsor is not well placed to deal with follow-up issues or claims arising in relation to the time of its ownership of Target. It also needs to be free to return the sale proceeds to investors without fear of claw back. This influences the approach to various transaction terms:

• Pricing: Sponsors are more likely to resist earn-outs and deferred consideration or escrow arrangements. These will delay their ability to distribute funds.
• Warranties: Sponsors generally only give basic title and capacity warranties and not business warranties. Rarely will they give an indemnity for a known risk. Alternative solutions are required such as W&I insurance or adjusting the upfront purchase price.
• Non-compete: Sponsors will not want to prejudice their future ability to invest or the actions of their portfolio companies and so will resist giving broad restrictive covenants.

Transfers of certificated shares in unlisted companies are effected by a stock transfer form. Provided the shares are fully paid the stock transfer form is only required to be executed by the Seller.

Subject to certain limited exceptions, the transfer will attract stamp duty. Stamp duty is 0.5% of the consideration and is universally paid by the Buyer. As a result, stamp duty is an important consideration in any PE transaction.
The transfer cannot be registered in the Target’s register of members until the stamp duty has been paid. The process for payment and “stamping” the stock transfer form can take several weeks. The Buyer will normally require the Seller to grant it a power of attorney over the shares for the period until the transfer is registered. This power of attorney will allow the Buyer to exercise all rights attaching to the shares until it is registered as the holder.

The sponsor will typically provide an equity commitment letter (“ECL”). Under the ECL, the relevant sponsor entity will commit to fund the SPV a specified sum (being the equity portion of the purchase price) at completion, subject to the satisfaction of the conditions precedent in the SPA. The commitment in the ECL is generally given to the SPV but with the Seller having the ability to enforce the rights of the SPV.

It will also provide evidence that it has sufficient debt commitments to cover any debt portion of the purchase price whether in the form of a debt commitment letter from the relevant lenders or a signed facility agreement.

Locked-box pricing mechanisms are seen in the majority of PE transactions. They are particularly prevalent in auction processes. They are viewed as more attractive to a sponsor Seller, providing more price certainty, with economic risk passing to the Buyer at a much earlier point and avoiding the need for potentially lengthy and contentious post completion adjustments, which in turn delay the distribution of sale proceeds. In addition, factors which may otherwise advocate for a completion account mechanism, such as:

• difficulty in putting a perimeter around and preparing locked-box accounts for the Target business;
• insufficient time to prepare and diligence the locked-box accounts; and
• Buyer leverage,
  are less likely to be present in a planned auction process scenario.

There are several means of risk allocation commonly used:

Purchase price calculation:

Under a locked-box mechanism the Buyer will price the business as at an historic accounts date (the “locked box date”) on a cash-free debt-free basis and assuming a normalised level of working capital. The Buyer assumes the risk of Target’s performance from the locked-box date forwards and may often pay the Seller an “equity ticker” for the period from the locked box date to completion (given that Buyer will benefit from any upside from that point onwards but Seller will not receive its funds until completion). To protect against cash being stripped out of the business, Seller will give a leakage covenant, indemnifying Buyer for value transferred from Target to Seller and its related parties between the locked-box date and completion, with certain ‘permitted leakage’ exceptions.

Separately, if a sponsor Buyer is not comfortable with Target management’s future projections, it may propose that an element of the purchase price is deferred and structured as an earn-out so that it is only payable if future performance meets certain hurdles.

Lastly, as sponsor Sellers are reluctant to give indemnities, Buyers are often pushed to price-in the value of specific identified risks.

Warranties and tax covenant:

There will typically be a wide ranging set of warranties (each of which will normally be categorized as either a fundamental warranty, business warranty or tax warranty) and also a tax covenant (in respect of tax liabilities arising out of Target’s actions up to completion). The bigger questions being: who is giving and who is standing behind the warranties; and what limitations are placed on their liability in terms of time limits for making a claim, de minimis hurdles for any claim and maximum aggregate liability. The answer to these will differ depending on whether it is a fundamental, business or tax warranty.

The warranties will be qualified by matters which have been “fairly disclosed” against them. Disclosure is by means of a separate disclosure letter and typically also by means of a data room rather than by schedules to the SPA as in the US.

Liability for breach of warranty is calculated by reference to the diminution in value of Target as a result of the warranty not being true rather than on a GBP£ for GBP£ indemnity basis as in some jurisdictions.

Termination rights:

It is unusual to have a MAC provision to allocate risk in relation to the period between signing and completion. What is more common is for the warranties given at signing to be repeated at completion and there potentially to be a right of termination if an event occurs which would otherwise constitute a “material” breach of warranty when the warranties are repeated. This is of particular relevance where recourse for the “business warranties” is solely under a W&I insurance policy. The W&I insurance will normally only extend to the warranties when repeated at completion if there is a further disclosure exercise against those warranties and, as a result, identified issues which arise between signing and completion will not be covered.

The:

• mis-match between the warranty package which a sponsor and any management shareholders are able and prepared to give and the minimum level of protection which most Buyers will require; and
• the reluctance of a Buyer to bring a claim post-completion against the very management team which it is trying to incentivize,

means that W&I insurance has become the default in UK PE transactions.

In an auction process, Seller will often line-up buy-side W&I insurance which the preferred bidder can effectively step into. This is often referred to as a “stapled policy”. It gives Seller control and visibility over the W&I process and avoids multiple bidders going into the market at once to source cover. The knowledge that a suitable policy is available allows Seller to prepare the auction draft sale documentation, and require all bids to be submitted, on the basis that Buyer will take out W&I insurance.

Public to private (P2P) transactions comprised almost 50% of successful takeover offers for UK public listed companies in 2025. After several years of fluctuating activity, the overall number of transactions was broadly similar to 2024, but with fewer high value transaction (consideration over £1 billion).
The focus on mid-market companies in emerging sectors meant that there was a growing trend for PE bidders offering innovative forms of consideration as an alternative to cash (such as unlisted securities or “stub equity”), aimed at larger founder shareholders.

The UK has the National Security and Investments Act (“NSIA”) regime. Under the NSIA there is a mandatory obligation to notify the Investment Security Unit of a proposed acquisition or consolidation of control (which includes acquiring more than 25%, more than 50%, or 75%+ of shares/voting rights) of an entity that performs activities in any of 17 sensitive sectors. Notably from a PE perspective these include: data infrastructure, AI, communications and transport.

If a transaction is a “notifiable acquisition”, it cannot complete until clearance is obtained. Completing a notifiable transaction without approval is an offence and will mean the acquisition is void.

Even if an entity is not operating in a sensitive sector, an acquisition can be “called in” for assessment if the Secretary of State reasonably suspects it has given, or may give, rise to a risk to national security, with the risk of call-in higher where an entity’s activities are closely linked to one or more of the sensitive sectors. The UK Government may then clear the acquisition or, if necessary and proportionate, impose conditions, block or unwind it completely. As a result, a voluntary notification to clear the acquisition in advance may be prudent depending on the activities Target undertakes.

The UK has a voluntary notification regime. There is no requirement to notify or to obtain clearance from the Competition and Markets Authority (“CMA”) before completing a transaction. However, the CMA tracks merger activity to monitor whether unnotified transactions may give rise to potential concerns. As a result, a sponsor may choose to voluntarily notify a proposed acquisition and make CMA approval a condition to completion.

Where an acquisition is conditional on CMA approval or the approval of another competition regulator, the SPA will set out the obligations of the:

• Buyer to attempt to obtain approval; and
• Seller to assist and provide all relevant related information which the Buyer/regulator may require.

Generally, the SPA will require Buyer to: make the initial filing by a certain time; promptly respond to requests from the regulatory authority; and consult with/allow the Seller to comment on any relevant correspondence. What is more contentious is the extent to which Buyer is required to agree in advance to offer or accept any conditions, restraints or disposals which the regulatory authority may insist on before it grants approval, without knowing at the time what those requirements may be. A sponsor, like any Buyer, will be reluctant to do so without a limit on the upper threshold of such conditions and is unlikely to accept a so called “hell or high water” standard (i.e. to take any and all steps necessary, including divestments) which may affect its existing portfolio holdings.

Minority equity investments with robust protection rights continue to be popular, in particular in infrastructure and at the opposite ends of the value spectrum – large high value and early stage growth businesses. At the growth end sponsors are more likely to have additional protections in the form of anti-dilution and preference in a liquidation.

Continuation fund transactions are increasingly being utilized as an alternative exit route. To the extent that the first continuation vehicles are starting to rollover assets again to a second continuation vehicle in so called “CV squared” transactions. The initial concerns with continuation vehicles around potential conflicts of interest over valuations have been addressed through, among other things, third party valuations, LP approvals and processes to bring in additional co-investors providing a valuation point. The development of the CV squared transaction has meant that some investors have focused more closely on agreeing as part of the terms to an initial continuation vehicle that any future continuation transaction (CV squared transaction) will be subject to a range of such protections and constraints.

Incentive schemes for UK based managers are typically structured as a share based scheme to attempt to:

• align the interests of management with those of the sponsor; and
• provide a more tax beneficial outcome than a performance based cash bonus.

The sponsor will generally fund the vehicle used to acquire Target (“Bidco”) by subscribing for a combination of: ordinary shares; and preference shares or loan notes, referred to collectively as the “Institutional Strip”.

As part of the incentive scheme, managers will be invited to subscribe for ordinary shares, often a separate class of ordinary shares, in Bidco. This will normally be at a lower price than the sponsor, either because the majority of the value sits in the preference shares or loan notes (such that the ordinary shares have limited value) or because of economic hurdles or ratchets applying to the class of ordinary shares held by management which depress their value. This leads to the shares being referred to commonly as “sweet equity”.

The sweet equity shares will rank behind the sponsor’s preference shares/loan notes such that, on an exit, the transaction proceeds have to be enough to repay any third party debt and the preference shares/loan notes before the sweet equity has any value. The sweet equity shares dilute the interests of the institutional strip ordinary shares over and above this value break and may benefit from a ratchet mechanism entitling them to a greater share in particular circumstances.

If a manager leaves prior to an exit event then whether they are required to transfer their shares (and therefore not benefit from any future exit) and the value at which they are required to transfer their shares will depend on what circumstances have lead to the manager leaving and their leaver “classification”.

Most incentive schemes aim to ensure that capital gains tax treatment for the relevant individuals is possible and ensure that employment tax charges are not incurred (by the individual or the Group) on an eventual exit. Among other things, income tax rates for higher rate tax payers in the UK are substantially higher than CGT rates on a sale of shares.

For employment taxes not to arise on acquisition, the individual must pay at least the unrestricted market value (“UMV”) of the shares (that is, the value of the shares as if they were not subject to any transfer or other restrictions). If the shares are acquired for the UMV then any subsequent disposal at a future higher market value should also be subject to capital gains tax and not income tax. HMRC will not confirm the parties’ assessment of the UMV. To provide greater certainty that employment taxes will not arise later on disposal the individual and the employing entity can make an election (a “section 431 election”), such that the individual is treated as having acquired the shares at UMV. This generally limits any income tax due to the difference between the amount paid (if any) for the securities and their UMV at acquisition. There are benefits to the employer as well in making a section 431 election such that it is not uncommon for it to be a condition of any scheme that all individuals enter into a section 431 election.

If managers are unwilling or unable to pay UMV for the shares on acquisition, some sponsors will consider permitting them to take a loan from the Group to fund the acquisition. When this occurs, care needs to be taken to ensure that the loan is respected as a true debt and to manage adverse tax consequences for the managers (if insufficient interest is payable on the loan) and the Group (which may be subject to a tax charge if the loan is within specific rules known as the loans to participators rules).

Senior managers are often subject to multiple overlapping non-compete provisions potentially arising in the:

• SPA for the initial acquisition of Target – if the manager was a selling shareholder;
• investment agreement in respect of Bidco if they are a shareholder in Bidco going forwards; and
• manager’s new/revised employment agreement.

Any covenants must go no further than is reasonable (in terms of duration, activities covered and geographical reach) to protect the sponsor’s legitimate interest in the goodwill of Target. Otherwise, they run the risk of being unenforceable. What is considered reasonable in the context of an individual in their capacity as a shareholder differs from what is reasonable in their capacity as an employee and their ability to work. As a result, restrictive covenants in a SPA or investment agreement in the region of 12-24 months are not uncommon. Whereas restrictive covenants in an employment agreement would more typically be in the region of 6-12 months.

It should be noted that the UK Government is consulting on potential reforms to non-compete clauses in employment contracts. Options under consideration include: a limit on the time length; a complete ban; a ban below a salary threshold; and a combination of a ban below a salary threshold and a time limit.

The governance of a portfolio company is regulated by its articles of association and the investment agreement in respect of its relevant holding company. These provide:

Board control – the sponsor will typically have the right to appoint a board majority and/or control the board through weighted voting rights. The sponsor may not always take up all of its board seats but will have a presence on the board to ensure oversight (in addition to its standing information rights). Control of the board also gives the sponsor the ability to determine the delegated authorities given to operational managers.

Contractual veto rights – the ability to control the board will be under scored by contractual provisions in the investment agreement setting various guard rails within which the business should be run and an often lengthy list of reserved matters which cannot be undertaken without sponsor approval.
Ultimately the sponsor or an entity controlled by the sponsor has the ability to requisition shareholder meetings and pass shareholder resolutions. It is this which underpins the sponsor’s other control rights but is not utilized for day to day control.

Management pooling vehicles are not commonly used simply as a result of a sponsor controlled entity having a large number of employee shareholders. Unlike in some jurisdictions, there is no restriction on the maximum number of shareholders there can be in a private unlisted company.

The potential administrative burden of dealing with a large number of individual shareholders can be addressed in the company’s governing documents through setting appropriate consent thresholds. Similarly, provisions can be included to allow an appropriate majority to deliver particular outcomes, such as a drag-along provision to achieve a 100% sale.

Debt finance for UK leveraged buyouts can be funded from various sources, most commonly the broadly syndicated loan markets, private credit/’unitranche’ loans or high yield bonds for senior secured debt along with second lien, Holdco PIK and other ‘junior’ debt products for larger, more complex transactions. Deals customarily include a revolving credit facility, for working capital purposes, which will usually rank alongside senior syndicated loans or on a super-senior basis where the senior term debt consists of direct loans or high yield bonds. Documentation is usually English law governed, with the exception of high yield bonds, where investors expect New York governing law.

Small financings, below the £200-300 million range, will usually be funded by commercial banks, credit funds or other direct lenders. Medium financings over that size, provided that they are non-distressed credits, will have more options, potentially including syndicated loans. Investors in the largest transactions typically seek the liquidity of the broadly syndicated loan markets or high yield bonds, often both at the same time to maximize available liquidity. However, in the last few years, credit funds and other direct lenders have been writing larger tickets and/or forming clubs with other direct lenders to compete for the biggest broadly syndicated fundraisings.

A UK public company may not give financial assistance for the acquisition of its shares or those of its parent company (whether public or private) and UK private companies may not give financial assistance for the purpose of acquisition of shares in a public parent company. However, where the company being acquired is a private company there are no financial assistance restrictions applicable to it or its private company subsidiaries.

For the purpose of public to private transactions in the UK, it is customary to re-register the Target and any other public companies in the group as private companies before they grant guarantees and security in connection with the financing.

The Loan Market Association (“LMA”) forms of credit agreements tend to be used with only moderate amendments only in the context of smallest financing transactions (<£50m). However, from the mid-market upwards, private equity sponsors often regard the LMA documentation as too lender-friendly and not reflective of the more sponsor-friendly terms which have developed in the UK market over the past decade. Therefore, sponsors tend to start with their own precedent documents from previous deals. However, repeated review by lenders in the syndicated loan markets and by bond investors has led to a convergence of terms both across deals and between the loan and bond markets, with credit agreements for top sponsors/larger deals often containing bond-style incurrence covenants.

In practice, the level of negotiation will depend upon the strength of the underlying credit, the private equity sponsor and the particular market dynamics at the time the financing is raised. Where a syndicated deal is likely to be oversubscribed, sponsors will be reluctant to engage in detailed negotiation beyond a few points (usually pricing and other key economics) but for weaker deals, lenders may have scope to push back on a wider range of issues. The dynamic on credit fund/unitranche deals, where lenders will usually be taking and holding the debt, is different and historically credit funds have been more concerned to negotiate protective documentation, in terms of both economics and covenants. In recent years however competition with the syndicated market has led to more flexible sponsor-friendly terms, at least for larger unitranche deals where terms have substantially converged with the syndicated market.

When market dynamics offer lenders an opportunity to push back against sponsor-friendly documents, they tend to focus primarily on economic terms, such as interest rates, OID and margin ratchet step-downs and the ‘value protection’ provisions contained in the negative covenants. Key covenants are those governing the ability of borrowers to incur additional debt, to dispose of assets and/or the Restricted Payments covenant, which limits payments to shareholders or holders of junior debt. Heavily negotiated terms include the level and definitions of ‘basket’ permissions under the covenants, for example the inclusion of super-grower/high watermark baskets, along with the ability to addback uncapped adjustments to EBITDA.

Over the past two years there has also been a strong focus by lenders on adding so-called LME blockers, designed to prevent borrowers from carrying out liability management exercises which might remove key assets from the restricted group or introduce uptiered debt, which ‘primes’ existing lenders. Requests for JCrew, Chewy and Serta blockers have become extremely common and these are now included in many new loan deals.

Another development recently seen in the syndicated loan markets is the inclusion of portability provisions in loan agreements, which permit the facilities to remain in place, subject to certain conditions, following an exit by the original sponsor upon transfer to a new owner. This is a provision seen on larger deals only and not all sponsors request it but the feature has recently been used by exiting sponsors and is a growing area of focus in negotiations.
In the credit fund/unitranche market, sponsors have also been pushing for broad payment-in kind (“PIK”) rights in relation to interest, including PIK-toggle availability across the life of the loan and/or the right to PIK interest on the full amount of the facility. Private credit lenders are reluctant to accept such terms but the competitive nature of the market means that they have been appearing on some transactions.

The private credit market in the UK is very well developed and now competes with the syndicated loan markets and bond market at all levels of the credit spectrum. There has been a huge amount of fundraising by private equity credit funds over the past few years and reports suggest that ‘dry powder’ waiting to be deployed far exceeds the amount of deal flow available for investment. Private credit is a very important source of debt funding for borrowers, particularly those with a more complex credit story or those seeking higher leverage or during periods of geo-political market disruption, when widely distributed financing markets may be on pause.