10.5 Private Equity and Refinancing 383On the other hand, the judgment of the ECJ in Sevic can easily be applied even
to cross-border divisions. In the light of Sevic, cross-border divisions cannot be
prohibited as such. However, in the absence of a directive on cross-border divi-
sions, the exact manner in which cross-border divisions are undertaken and how
shareholders, creditors and employees are protected is still open. Member States
should preferably adopt specific rules for cross-border divisions. In the absence of
such rules, it is for the courts to decide how cross-border divisions can take
place.^266
10.5 Private Equity and Refinancing
A private-equity firm (or a private-equity fund) is a firm that is in the business of
leveraged buyouts of privately-owned or listed companies. The private equity in-
dustry has developed refinancing as a way to finance the takeover from the assets
of the target and to increase returns. Exit is a core component of the business
model of private-equity firms.
Private-equity firms have influenced the financial decision-making of large
firms. One of the reasons why listed companies tend to have extensive share buy-
back programmes is the need to react to the threat of being taken over. The distri-
bution of assets to existing shareholders in advance can make a threatening LBO
more expensive for the buyer, as it would be more difficult for the target to repay
the buyer’s short-term loans after the takeover. For the same reason, listed compa-
nies tend to own only their core assets and choose a high debt-to-equity ratio.
Private equity fund. The first step in the business model of private-equity firms
is to raise equity capital for the fund. The fund will usually be a limited partner-
ship.
In a limited partnership, most questions can be based on contract. There is no
mandatory legal capital regime. It will therefore be easy to make payments to in-
vestors. Investors may use a holding company with limited liability in order to re-
duce legal risk or for tax purposes.
The private-equity firm will usually be the management firm and the general
partner that has unlimited liability; however, the private-equity firm will be
shielded against unlimited liability by means of a holding company.
The management firm will receive a management fee and a percentage of the
profits. The management firm (the general partner) might invest some equity capi-
tal in the fund (1%-3%). The rest will come from investors (limited partners). The
management firm will charge an annual management fee on committed capital
(1%-2.5%) as well as a bonus (carried interest, typically up to 20% of the profits).
Carried interest becomes payable once the investors have achieved repayment of
their original investment in the fund, plus a defined hurdle rate (perhaps 6%-
10%).^267
(^266) Siems MM, SEVIC: Beyond Cross-Border Mergers, EBOLR 2007 pp 314–315.
(^267) Rudolph B, Funktionen und Regulierung der Finanzinvestoren, ZGR 2008 p 177.