To meet their performance objectives, private equity firms must rely on talented, highly motivated managers within their portfolio companies.
To date, aligning the financial interests of portfolio company managers with those of investors has proved to be the most motivational tool in driving them forward. But is this alignment still there in the current financial and economic downturn, which may have resulted in a drop in enterprise value?
One consequence of the current financial and economic crisis is that private equity houses may have to cope with “underwater” equity and should consider resetting management incentives so that they continue to deliver what they are intended to: retention, motivation, reward and alignment. The question is how this resetting can be appropriately structured from a tax and legal perspective.
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