MEXICO Law and Practice Contributed by: Gabriel Robles, Héctor Cárdenas, Eric Silberstein and Eduardo Aiza, Ritch Mueller
5.3 Funding Structure of Private Equity Transactions Private equity investments are conducted with a mix of equity and financing. For the purposes of the equity, private equity funds do provide an equity commit - ment letter, subject to general caveats such as due diligence. In relation to financing, sellers generally ask that a commitment letter from a financial institution be deliv - ered at signing. This provides sellers with the certainty that sufficient funds will be in place for closing and comes at a cost to the fund because a commitment fee is payable at signing. Financing could be in the form of a bridge loan to be refinanced following the acquisition, which is the more expensive option as the interest rates are higher, or a term loan, which is the more suitable option but also the one that takes longer. This has not changed over the last 12 months. 5.4 Multiple Investors Consortiums Consortiums are a standard structure conducting private equity transactions, specifically in instances where certain assets are limited for acquisition pur - poses or where the ticket is too high. Consortiums entail entering into agreements as to how the consor - tium will vote and/or conduct investments. Co-Investors Co-investment is also a standard practice, particularly in respect of international private equity funds. In this case, the private equity fund negotiates the deal and incorporates another entity at the end. The sellers do not interact with the co-investor which, in many cases, is an institution such as a multilateral bank. These co- investors are passive and all the business and nego - tiation is fronted and carried by the fund. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism Initial Cash Payment In Mexico, the main form of consideration is an initial cash payment at closing based on a multiple of the enterprise value which is then subject to a closing or post-closing adjustment, mainly based on work -
ing capital, debt and cash. In some instances, such as a deal with a simultaneous signing and closing, the price may be fixed and not subject to adjustment, as all pricing components are known at the time of closing. Earn-out payments for existing shareholders As mentioned before, the Mexican market has adopt - ed as common practice the structuring consideration for private equity transactions of granting the existing shareholders earn-out payments based on a set of performance metrics that take into account the finan - cial information for the ongoing year, future perfor - mance or a mix of both. Rollovers for existing shareholders Another form of consideration that comes in the con - text of private equity transactions is rollover for exist - ing shareholders, whereby the existing shareholders receive equity in the acquiring entity and share limited corporate rights and full economic rights in addition to exit rights (and obligations) together with the private equity fund. This feature works well in the context of acquisitions where the private equity fund acquires 100% of the target and generally intends to conduct the target’s operations. This consideration mechanism has its challenges, the main one being that it limits the amount of the cash-out consideration for the existing shareholders and could dissuade them from closing the transaction. Deferred Consideration Deferred consideration is a must in any mid-size or bigger transaction. Deferred consideration is the most efficient form of securing indemnification for poten - tial known (assuming this is negotiated) or unknown contingencies that materialise within a period of time following closing. The main structures for negotiating a deferred payment are either (i) a holdback, whereby the buyer retains a portion of the purchase price and releases periodic payments (assuming no indemnifi - cation payments are required to be made), which is a pro-buyer/investor mechanism and is considered an aggressive provision; or (ii) an escrow, whereby the buyer deposits a portion of the purchase price with an independent third party (eg, a Mexican trust executed by a Mexican financial institution) which, in turn, releases funds pursuant to the trust agreement
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