PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
5.4 Multiple Investors Deals involving a consortium of private equity spon - sors are not common in Puerto Rico, but co-invest - ment by other investors, including corporate inves - tors, alongside the PEF is very common. Of late, the majority of PEF sponsors are requesting the ability to offer co-investments as an attractive element of their structures during the organisation stage of the fund. For example, co-investments tend to provide private equity firms with more flexibility regarding the terms and conditions of a particular transaction. Private equity firms can have more capital available to invest in other projects rather than in a single transac - tion. Co-investments may also improve relationships with investors and the distribution of the investment risk. For co-investors, the co-investment transaction may allow exposure to additional information and access to due diligence or materials that would not otherwise have been available solely to the PEF. Co-investments can also help the co-investor make better decisions and adjust their portfolio to best fit their investment needs. Another advantage is that an institutional investor may be privy to better fee arrangements in the co-invest - ment SPV compared to investing in the main PEF. For example, a private equity firm that may wish to attract institutional investors could reduce the fees. Lastly, co-investors are typically limited partners, or their affiliates, alongside the general partner/member by way of passive stakes by the co-investors, and where the fund and its limited partners/members are already investors. In some limited circumstances, external co-investors operate alongside the general partner of the fund by way of passive stakes. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism The predominant form of consideration used in private equity transactions in Puerto Rico is cash. Earn-outs and deferred consideration are not common features of private equity transactions in Puerto Rico. However,
some PEFs opt to implement a milestone approach to investment, where a second larger investment is made in a company once it has achieved certain perfor - mance metrics. There has recently been an increase in in-kind investment in PEFs as the benefits of these types of investment have become more acceptable from the standpoint of government agencies, such as the Puerto Rico Treasury Department, OI and OCIF. The involvement of a PEF may affect the type of con - sideration mechanism used, depending on whether the fund has elected to operate with a tax grant under the Incentives Code, and on whether the partners in the fund hold individual tax grants also issued under the Incentives Code. If the fund and the partners do hold tax grants, the fund will mainly target income streams covered under those grants. Historically, a private equity buyer would not usu - ally require enhanced or additional protections when making an investment, but this has begun to change recently as private equity buyers are starting to request the same enhanced protections typically used by institutional buyers. Corporate buyers will typically request collateral and other types of security instru - ment to protect their investment. 6.2 Locked-Box Consideration Structures The vast majority of private equity transactions are based on locked-box considerations, but no interest is charged on leakage. 6.3 Dispute Resolution for Consideration Structures Generally, dispute resolution mechanisms are in place for all types of private equity transactions. For exam - ple, whether resorting to alternative dispute resolu - tion mechanisms under the rules of the American Arbitration Association (AAA) or the more traditional approach of resolving disputes through the judicial route, dispute resolution mechanisms are common - place in private equity transactions. 6.4 Conditionality in Acquisition Documentation The typical conditions to closing are as follows:
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