USA Law and Practice Contributed by: Vijay Sekhon, Brien Wassner, John Godfrey and Justin Macke, Sidley Austin LLP
Alternative Exit Pathways Over the past 12 months, amid tighter financing mar - kets and valuation sensitivity, US private equity spon - sors have pursued a broader range of exit structures. • Dual-track exits remain relatively common, par - ticularly in sectors where public market appetite is rebounding (eg, healthcare, software, infrastruc - ture). The dual-track allows the sponsor to maxim - ise competitive tension and pivot based on execu - tion timing or valuation. • Triple-track exits, which layer in a dividend recapi - talisation process alongside a potential sale and IPO, have increased in prevalence, particularly in 2024–25 as private credit markets reopened, while SPAC transactions have remained subdued. Spon - sors have used this structure to: (a) extract partial liquidity via dividend recap if a full sale or IPO is delayed; (b) hedge against market volatility or regulatory delay; or (c) use the recap as leverage in a sale negotiation. Continuation vehicles/GP-led secondaries are also gaining traction for assets with long-term growth potential but insufficient liquidity in the current M&A environment. These are typically structured as sales to a new fund, with LP liquidity options and sponsor- led reinvestment. Rollover and Reinvestment Practices The following practices occur in secondary sales, especially PE-to-PE transactions. • Management teams often roll over a portion of equity, preserving alignment and signalling continu - ity. • In certain deals, the selling sponsor may reinvest alongside the new lead sponsor, particularly in strong-performing companies with further upside. This is more common in club deals or structured minority exits. • In corporate sales, private equity sellers generally fully exit, although partial rollovers can occur if the buyer is a strategic partner seeking a transitional ownership model.
In IPOs, sponsors may execute a partial exit at listing, retaining a stake through the lock-up period and sell - ing down over time. Full exits at IPO are rare due to market expectations and valuation impact. 10.2 Drag and Tag Rights Drag and tag rights are ubiquitous in US private equity structures for private companies. Drags ensure spon - sor control and exit optionality, while tags provide protection for minority holders, especially institutional co-investors. Management participants typically have limited tag rights and are routinely subject to drag, reflecting their subordinate governance position and alignment through incentive equity. The typical drag threshold requires a majority or super - majority of voting equity (often >50% or 66⅔%) to trigger the drag. In sponsor-controlled companies, the private equity fund typically holds the requisite thresh - old unilaterally. The drag typically applies to all equity classes, with minority holders required to sell on sub - stantially the same terms (including price, conditions and representations) and to waive appraisal rights, vote in favour of transaction and execute sale documents. Drag rights are commonly invoked to complete exits, especially where clean title is required (eg, IPO, corpo - rate sale), but less common where all shareholders are already aligned (eg, in management-heavy cap tables). 10.3 IPO In sponsor-led IPOs, the private equity firm typically agrees to a 180-day lock-up. These restrictions are negotiated with underwriters and cover both primary and secondary sales. Formal “relationship agree - ments” are not used in the US. Instead, sponsor rights are documented through: • registration rights agreements; • stockholders’ agreements (eg, board rights, con - sent rights); and • controlled company governance exemptions (if the sponsor retains >50% voting control). Sponsors often retain board seats and maintain gov - ernance influence post-IPO. Exit occurs via staged follow-on offerings. The dual-track IPO/M&A process remains a popular strategy for maximising valuation or hedging execution risk.
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