Management Equity Pool Size
- Sponsors are reserving 11% (at the median) of fully diluted equity for issuance via the management equity plan which is generally consistent with past studies.
- The tight range in pool sizes of 10% - 13% at the 25th and 75th percentiles reflects a tightening in market practice. Pool sizes of 15%+ were generally only reserved among equity investments of less than $100m.
- Sponsors continue to tie award vesting to challenging performance metrics. There is an overwhelming tendency to include MOIC in performance objectives (generally requiring a 3.0x return for full vesting).
- The majority of plans grant awards that are subject to both time and performance vesting conditions. More than 80% of firms tie at least a portion of awards to the sponsor’s financial return upon exit. Based on the survey respondents, over 80% of plans include Multiple of Invested Capital (MOIC) as a performance-vesting condition. Time-based awards typically vest ratably over five years.
- Growth-based vehicles (options and profits interests) are the rule for PE portfolio companies; use of profits interests has increased relative to previous studies.
- Sponsors and Management teams are increasingly taking advantage of the tax benefits offered by granting profits interests. Relative to earlier studies, the use of profits interests has increased to 44% of plans (vs. 56% option plans). Portfolio companies that are structured as partnerships may issue profits interests, which are economically comparable to stock options but allow participants to realize capital gains tax rates (rather than ordinary income tax rates). Note that corporate income tax deductions are not available upon the cash-out of profits interests, as are available for stock options.
- Relative to previous surveys, the allocation of fully diluted shares to the CEO has increased.
- CEOs received 3.0% of fully diluted equity (at the median) which reflects an increase from historical grants levels based on previous surveys which ranged from 1.8% - 2.1%, at the median. CEO allocations are generally inversely correlated to equity investment. Among investments of $300m+, the CEO generally received 2.0%-2.5% of fully diluted equity. Median grant levels for executives #2-#4 generally ranged between 0.4% - 1.0% of fully diluted equity.
- Sponsors are increasing the depth of participation in Management equity plans for larger investments. As expected, technology companies include the largest percentage of the workforce in the plans
- Participation is generally limited to senior management, however, participation increases among larger investments and those industries with a greater reliance on human capital. Among equity investments of $100m and above, median participation in the equity plan is approximately 32 employees, or about 3.6%of the total employee base (which reflects a slight increase from earlier studies).
- There is a direct correlation between investment size and participation with investments of $300m+ including approximately 50 employees, at the median.
About the survey
The survey was completed in 2018 using data provided by Private Equity firms on management equity plans at 43 portfolio companies acquired since 2016. PwC does not publish or disclose the list of participating funds or any individually identifiable information.
For more information, and to start a conversation contact Andrew Skor, Principal, PwC US.