Published data on how UK search fund deals divide equity is scarce. We analysed the articles of association and share filings of ten acquisition holding companies at Companies House.
Published data on how UK search fund acquisitions divide equity between searcher and investors is scarce. What circulates is largely practitioner rules of thumb and individual term sheets, which gives searchers little evidence to negotiate from.
The acquisition vehicles' own filings provide a better source. Every UK-registered company must file its articles of association, and any amendment to them, at Companies House, together with its share capital and the holders of each class. The articles set out the principal deal terms: the preference coupon, the order in which a sale is paid out, how the searcher's shares vest, and any ratchet on investor returns. We analysed those documents for the holding companies of UK searchers on our register, and retained the ten deals whose terms could be established from their filings.
The sample is small and is not a survey. Three deals are recorded as self-funded searches, two as investor-backed, and five are not recorded either way. The filings reflect each company's latest position, and only what is contained in the articles and the share capital; terms set out in the investment agreement, which is not filed, are outside the scope of this analysis.
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Start free trialMost of the deals use two classes of share.
Preference shares carry the investors' money. In most of these deals they carry no vote. On a sale they are paid first: their issue price plus a fixed preferential dividend, the coupon, which builds up each year and is paid when the shares are redeemed or the company is sold. "Cumulative" means a coupon not paid in one year is carried forward and still owed. "Compounding" means the amount carried forward earns the coupon too. A preference that takes only its issue price and coupon, and nothing more, is non-participating.
Ordinary shares receive the residual value once the preference has been paid, and are divided between the searcher and the investors. UK private equity calls the searcher's portion sweet equity. Because the preference shares carry the money, investors' ordinary shares can be issued for very little: in four of these deals, investors paid a thousandth or less as much for their ordinary shares as for their preference shares.
A ratchet adjusts the split at exit: the searcher's share of the ordinary increases if the investors' return exceeds a hurdle, measured as an internal rate of return (IRR) or as a multiple of the money invested.
Loan notes are the other common instrument for investor capital. They are debt, not shares, so they never appear in a statement of capital. Our method, which looks for holding companies with more than one class of share, tends to leave out deals financed that way, so this sample under-represents them. Three of the deals' articles expect investors to hold loan notes as well, counting them in the IRR test or in the lending documents.
| Deal | How the search was funded | Preference coupon | Compounds | How the searcher's equity is set |
|---|---|---|---|---|
| A | Self-funded | 8% a year, cumulative; the board may pay it in cash or in new preference shares | Not stated | Holds all of the ordinary shares; outside investors hold a minority of the preference shares |
| B | Self-funded | 11% a year, cumulative, tied into a preference of 1.5 times the issue price, which also shares in the upside | Not stated | About 63% of all shares (every class shares in the upside after the preference), with no vesting or ratchet |
| C | Self-funded | 8.5% a year, cumulative | Yes | Ordinary shares alongside the investors, plus a slice of up to 10% of the upside vesting over four years, and up to 10% more as investor IRR rises from 20% to 32.5% |
| D | Investor-backed | 8% a year on the issue price, cumulative | Yes | About 32% of the ordinary: a third vested at completion, a third vests over four years, a third as investor IRR rises from 20% to 35% |
| E | Investor-backed | None: investors get their money back only | n/a | About 45% of the ordinary, part of it bought alongside the investors: half vested at completion, half vests as investor IRR rises from 15% to 35% |
| F | Not recorded | 10% a year | Yes | About 65% of the ordinary, with no ratchet; leaver terms apply for the first 30 months |
| G | Not recorded | 10% a year, cumulative | Yes | About 53% of the ordinary: 80% vests over three years, and the last 20% is kept in full only at a 35% investor IRR or 4x, and lost progressively below that, down to about 23.5% or 2.9x |
| H | Not recorded | 12% a year, cumulative, then a catch-up that pays the searcher's shares their share of the coupon | Yes | A formula share of the upside: about 23%, rising to 35% as investor IRR rises from 20% to 35% |
| I | Not recorded | 10% a year, cumulative | Yes | Two searchers share a formula share of the upside: 25%, rising to 45% as investor IRR rises from 20% to 40% |
| J | Not recorded | 8% a year, cumulative | Yes | About 56% of the ordinary, with tranches tied to completion, four years' service and investor IRR from 20% to 35% |
"About" figures are the searcher's share of the ordinary shares by number, including any held through the searcher's own company and any bought alongside the investors. Where the table describes a formula or a ratchet, the share count does not describe the economics: the articles do. "Not recorded" means our register does not record whether the search was investor-backed or self-funded.
Nine of the ten deals carry a coupon on the preference shares. Four sit at 8% to 8.5%, three at 10%, one at 11% and one at 12%. Seven of the nine say in terms that the coupon compounds, in six of them annually, so unpaid amounts themselves attract the coupon and accrue until exit. US term sheets often call this PIK preferred. Strictly, PIK means paying the dividend in new shares, which only deal A's filings allow, at the board's choice.
The exception is deal E, where the preference returns the investors' money and nothing more. Investors in that deal earn their return entirely through their ordinary shares.
The headline rate does not capture the full cost to the searcher. In deal H, once the 12% coupon has been paid, the searcher's shares receive a catch-up equal to their proportionate share of it, so the effective cost to the searcher is considerably lower than the rate suggests.
In every deal that says when, the coupon builds up until the company is sold or the preference is redeemed, unless the board chooses to pay it earlier. None requires it to be paid in cash year by year.
In nine of the ten deals the preference is non-participating: once investors have received their capital and coupon, the residual passes to the ordinary shares. Deal B is the exception. Its articles set the preference at 1.5 times the issue price, in a definition that also takes in the 11% coupon; the drafting can be read as counting the coupon inside that figure or adding it on top. Investors then participate in the residual alongside the ordinary shares.
Redemption is at the company's option in the deals that allow it, except one where the searcher's own company picks the date. No outside investor can force redemption.
Seven of the ten deals link part of the searcher's equity to investor returns. The hurdles are closely aligned:
Several deals also apply time vesting: a tranche at completion and a further tranche earned monthly or quarterly over three or four years. A good leaver keeps what has vested, and unvested shares go back at their nominal value or are converted into shares worth nothing. In four deals a bad leaver forfeits the entire holding, including vested shares.
Three of the ratchet deals use near-identical drafting for the searcher's shares, with the same clause structure and, in two of them, the same IRR formula; two others share identical money-multiple tables. This suggests shared precedent documents. Deal D's split, a third at completion, a third over time and a third on returns, is the classic three-tranche search fund structure.
The three self-funded deals are built differently, but in each the searcher kept control:
Three deals are too few to define a typical self-funded structure, and their equity splits differ widely. Their common feature is control: in each, the searcher retains the decisions of most consequence to investors. Control is not confined to the self-funded deals. In two deals not recorded either way the searcher holds most of the votes, and in one the searcher's director outvotes the rest of the board.
Two structures are commonly quoted among UK searchers. The filings support some elements of each and not others.
To test a structure against a specific price and debt package, use our deal calculator. For who backs UK searchers and how many investors a typical search raises from, see our UK search fund ecosystem map.