Does comp determine deal structure?

It is no secret that bankers and private equity professionals make their real money on bonuses.  Comp structure is established around a set of goals and market assumptions.  What happens when the market or the goals change?  The obvious example is buyside fees that scale with the size of the deal.  In a competitive, robust market, companies want to buy the big, high quality, high value deal, and don't mind paying bankers who negotiate large transactions.  When the market goes south and we have more sellers and more distressed situation, the better strategy would be to negotiate valuations down aggressively, or take companies over by assuming debt.  Interesting to the bankers?  Not financially.  And here is a  new twist: private equity professionals at some major firms are compensated according to how much equity they put to work.  They are not compensated at all (until exit) for putting debt to work.  Leveraged deals should drive a higher IRR, but in an expensive debt market with uncertain exits, we now have a PE cadre incentivized for putting maximum equity in play.
Posted by , on 25 July 2008
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