In Their Own Words With Winston & Strawn’s Eva Davis

As the U.S. heads into another presidential election, private equity investors are once again focused on the potential impact the outcome could have on regulation governing the industry. On top of that, the effects of a global pandemic have heightened scrutiny of both deal and fund terms.

Eva Davis, co-chair of Winston & Strawn’s private equity practice and managing partner of the Los Angeles office, shared her thoughts about how the current environment is shaping terms and negotiations, and what managers are focused on achieving ahead of the November elections. As it concerns deal terms, she notes: “For working capital, topics for negotiation include whether anything ‘trumps’ GAAP [generally accepted accounting principles], what additional ‘accounting principles’ are used to limit GAAP or allow for items that are non-GAAP. This is particularly important in carve-out transactions where the seller’s overall financial size may be significantly larger than the target company that didn’t have separate stand-alone preclosing financial statements.

“We are also seeing more contested negotiations around earnouts, and covenants to which the buyer is willing to commit post-closing to increase the likelihood that the earnout will be achieved. Given the world seemingly turned upside down in the past six months, buyers have been reluctant to commit to particular obligations relative to a company’s operations in order to address future unexpected changes.” 

When asked how the COVID-19 pandemic affected negotiations around deal terms, (positively or negatively), Eva explains: “As buyers who closed deals that were signed pre-COVID are seeing below-expected financial performance from the targets they acquired, buyers are looking at possible ways to ‘get money back’ from sellers. Working capital disputes are a key area where many attempt to do so. Earnout metrics are also getting more creative.”

Click here to read the full Wall Street Journal article with more perspective from Eva on key issues facing private equity fund managers.