COVID-19 #15 Management Participation Schemes under water

The fact that Governments are gradually defining their exit strategy, does unfortunately not imply that managers are already seeing the exit horizon they were hoping for when they invested in the group. As we may have left the path of a buoyant M&A market, a lot of managers may be in dire straits as their management participation scheme is underwater.

This is especially true for managers in portfolio companies of private equity investors. Paradoxically, it is now that private equity investors need management most to be agile and realise a turnaround.

Item #15: Solving underwater performance – Management Participation Schemes

When a business is acquired by a private equity fund, the fund often calls upon management to coinvest at conditions laid out in a management incentive plan. The objective of such management participation is primarily to get management and investors aligned by requiring management to invest their own funds in the business and to put their skin in the game. Their personal gain or loss becomes contingent on the performance of the underlying business.

Depending on the dynamics of the transaction, the investment by management may just include ordinary shares or a combination of ordinary shares, preference shares and/or shareholder loans. The smallest underperformance of the target group may leave the ordinary shares – and most of the management investment – worthless, with all the value creation flowing to third party creditors and preferred equity instrument holders instead.

Although this is sometimes forgotten by tax authorities, there is hence a looming risk that managers don’t realise the anticipated return on exit and take a sizeable loss. Unfortunately, the ongoing situation may serve as a perfect example.

Another important consideration these days is that items such as debt restructuring may cause a dilution for the holders of ordinary shares or alternatively boost the equity value of the group (which may be to the benefit of the shareholders) and need to be thoroughly analysed from that angle before implementation.

The same goes for other direct or indirect adjustments to the management participation scheme, such as changes to the rights embedded in ordinary shares held by managers, to the coupon rate on the preference shares and/or the interest rate on the shareholder loans, the launch (or reset) of a new (existing) stock option plan, the impact of corporate restructurings, etc.

In a nutshell, when considering any such transactions, it is imperative to have a view of the possible implications on the management participation scheme to avoid discouraging managers or to import tax issues whether immediately or upon a future exit.


While most companies have applied for the COVID-19 measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: in order to give you a sounding board in these challenging times.