USA – CALIFORNIA Trends and Developments Contributed by: Mehdi Khodadad, Dan Clivner, Vijay Sekhon and Matthew Thompson, Sidley Austin LLP
IP chain-of-title, consumer disclosures and exposure under privacy and unfair competition regimes are receiving earlier and more technical scrutiny. In short, the concentration of companies in these sec - tors in California is generating substantial premiums in the market, but it is also raising the execution bar. And targets that cannot withstand a targeted commercial and legal diligence review will face valuation pressure or elongated sale processes. In PE M&A, exits are returning, but the routes are evolving Sponsors continue to manage a meaningful inventory of aging portfolio companies, and California-heavy portfolios – particularly in tech, software and life sci - ences – are no exception. While exit activity is improv - ing, current paths to liquidity are more varied than in prior cycles. Three themes are prominent. • Continuation vehicles: single-asset continua - tion funds and GP-led secondaries have become mainstream tools rather than perceived “last resorts.” Where valuation gaps remain or where sponsors see a clear path to improved operating performance over the next 18–36 months, struc - tured liquidity should be a common alternative to a near-term sale. • Sponsor-to-sponsor transactions: in a still- selective environment, sponsors are increasingly selling portfolio companies to other sponsors. In these transactions, sponsor buyers are typically underwriting a defined operating plan, rather than basing valuations on multiple expansion or market momentum. • Capital-structure discipline: despite the recent press, private credit remains a critical component of the deal financing landscape, but sponsors are approaching leverage and covenants with greater discipline. Highly levered capital structures – par - ticularly in recurring-revenue software businesses that are prevalent in California – are being thor - oughly stress-tested against downside scenarios. For California-based companies considering an exit, preparation is increasingly determinative. Robust quality-of-earnings analysis, a clear understanding of customer concentration risk and defensible go-to-
market metrics will materially enhance the likelihood of a successful sale. Regulatory risk remains central to deal terms Even where regulatory clearance is ultimately expect - ed, process risk continues to shape deal negotiations. Parties are allocating antitrust and regulatory risk with greater specificity, including enhanced co-operation covenants and remedy frameworks. Transactions involving California-based technology, life sciences and consumer-facing companies warrant particular attention to regulatory concerns and potential rem - edies that regulators may impose early in the deal process. Privacy and data regulation as a front-end issue California continues to be at the forefront of privacy enforcement. In particular, the California Privacy Pro - tection Agency (CPPA) has demonstrated a willing - ness to pursue meaningful penalties for company data practices. As a result, buyers are becoming less inclined to rely on generic indemnities to bridge com - pliance gaps. Instead, deals are increasingly incor - porating bespoke covenants addressing pre-closing remediation, security enhancement roadmaps and, where applicable, modifications to marketing prac - tices. Accordingly, privacy maturity is becoming a differentiating factor in sales processes for California businesses. Labour mobility and talent retention California’s statutory restrictions on employee non- competes continues to distinguish it from many other jurisdictions. In California, where talent is frequently the primary asset in a transaction, this legal frame - work has material implications. Buyers are continuing to assess the enforceability of restrictive covenants, utilising the sale of business exception for non-com - petes and designing retention frameworks that comply with California law. Confidentiality protections, inven - tion assignment agreements and carefully structured incentive equity arrangements are increasingly central components of transaction planning. Bottom line for 2026 2026 is well positioned to be a strong year for deal activity. This is particularly true in California, where companies are often at the intersection of AI, soft -
1396 CHAMBERS.COM
Powered by FlippingBook