Eva Davis Discusses Resurgence of Earnouts in PE Dealmaking

In the wake of the downturn, private equity investors are looking to navigate the uncertainty around valuation and risk.

Eva Davis, Co-Chair of Winston & Strawn’s Private Equity Practice and Managing Partner of the firm’s Los Angeles office tells peHUB, private equity investors tend to be more creative and willing to create structures that try to allocate risk and refocus on due diligence—this can be simple in concept but difficult in implementation.

Eva shares: We’ve been in a sellers’ market now for the past two plus years; and everything was focused around maximizing cash to the seller at closing. In the wake of the downturn, however, literally every deal on my desk has an earnout component to it and did not have an earnout component two or three months ago.

She also shares, there are no market norms right now, you’re creating your own market real-time in terms of reps, warranties, structure and purchase price. And the main focus is on those earnouts.

Eva is also working with clients to understand the merit and utility of full equity backstops. In the Q&A, she also argues that in times like this, M&A activity is also a source of liquidity. So, why not have the private sector offer liquidity that happens through M&A and other financing activities which is not at taxpayers’ expense.

Read more insights Eva shared with peHub here (subscription required).