Management Equity Plans (MEPs): What FDs Need to Know Before a PE Deal

Management equity plans (MEPs) are something most finance directors will only negotiate a handful of times in a career, usually mid deal and under pressure. FD Recruit put that gap to good use in its virtual boardroom, hearing from Jeff Soh, partner at Liberty Corporate Finance, on how these schemes actually work. 

“No equity plan is perfect until you’ve been through that journey.” 

What Management Equity Plans Actually Rewards 

Jeff opened by explaining why private equity houses bother with these schemes at all. A PE investor is typically targeting two to three times invested capital within five years and they need the management team pulling in the same direction. Equity does that job. It attracts the right people, keeps them through a difficult hold period and gives them a real stake in the outcome rather than a bonus dressed up as ownership. 

On entry, most of the fund’s capital sits in fixed return instruments such as loan notes or preference shares, with a smaller slice going into ordinary shares. Management typically co-invests alongside the fund in the same mix, known as the institutional strip, then receives an additional slice on top called sweet equity. That extra layer is what lets a management team outperform the fund’s own return multiple if the exit goes well. 

Rollover, Sweet Equity and the Numbers That Matter 

Liberty advises on around 50 to 60 deals a year, which gives Jeff’s team a rare view of market norms most FDs never get to benchmark against. He shared several figures worth keeping in your back pocket for the next negotiation: 

• Rollover: 40 to 50 percent is the common range, with most PE houses opening at 50 percent 

• Sweet equity: typically sits between 15 and 20 percent of the fully diluted pool 

• Fixed return instruments: usually carry an 8 to 12 percent coupon, with 10 percent the current norm 

• Executive split: a CEO commonly takes 20 to 30 percent of the pool, with a CFO receiving roughly 30 to 50 percent of what the CEO gets 

Structuring a Management Equity Plan Before You Sign Anything 

Jeff was clear that the work should start well before a term sheet lands. Existing plans often carry unallocated shares that need distributing early, since anything allocated too close to exit risks being taxed as income rather than capital gains. He also urged FDs without a plan in place to understand who is acquiring the business, what reinvestment will be expected and whether an exit bonus or loan mechanic will fund it. 

“Where you are being asked to reinvest, you should really have a right to take advice and understand what you are reinvesting, how much you are reinvesting and what you are reinvesting into.” 

Ratchets and the Upside Worth Fighting For 

A ratchet delivers extra sweet equity once the fund clears a set return hurdle and Jeff flagged a distinction worth knowing before any negotiation. An excess ratchet only rewards value above the threshold, while a total equity ratchet, sometimes called a catch-up ratchet, lets management take the next slice of value until they catch up to a full percentage share. The second version is considerably more valuable, so it is always worth asking which one is on the table. 

Leaver Provisions and Protecting What You Have Earned 

Leaver terms decide what happens to your stake if you exit the business and Liberty groups these into good, intermediate, bad and very bad categories.  

Rolled investment sits outside these provisions in most cases, protected because it represents capital the management team has already put in. Sweet equity is treated differently depending on circumstances, from fair value on a good leaver down to cost only for gross misconduct or a voluntary resignation. 

In Summary 

For any FD heading into a transaction, a management equity plan is not something to leave to the lawyers at the last minute. Getting the structure and the leaver terms right early protects far more than a payout on exit.