CEO Buyouts and $600M Tenders: Growth Equity's New Playbook

Priority Technology agreed on Monday to be bought by its own chairman and CEO, Thomas Priore, at $8.05 a share — a 65 percent premium and roughly 30 percent above his first offer last November. Searchlight Capital provided the financing. The rising price suggests the independent directors, who had to negotiate against their own boss, did their job.

The deal is the first sizable transaction of its kind since the Delaware Supreme Court upheld the state's new rules for controlling-shareholder deals in Rutledge v. Clearway. Under Delaware law, a deal like this needs approval from both an independent committee and a majority of shareholders outside the buying group. The lesson from KnowBe4 in May still applies: every claim against that board over Vista's $4.6 billion purchase was thrown out because the independent committee had real authority and outside shareholders voted with full information. Courts ask for a process the board can explain, not a perfect one. Expect more management buyouts while stocks stay cheap and executives have backers.

The same week, Vitruvian Partners led a $600 million investment in Angle Health, a health insurer, at a $2.7 billion valuation. Only $200 million is new money for the company. The other $400 million buys shares from existing holders through a tender offer. That is what a growth equity deal looks like this year: one check that funds the business and lets founders and early investors take money off the table.

Two terms decide whether a tender goes well: who is allowed to sell and in what order, and what the sellers promise. The company should stand behind its statements; the people selling shares should not have to.

The rate math. The Federal Reserve raised its target range to 3.75 to 4.00 percent — its first hike since 2023 — and sixteen of eighteen officials expect another increase this year. The Fed's projections show no cuts through 2027. The interest rate on a loan to buy a mid-sized software company has climbed from about 3.8 percent in 2021 to about 9.4 percent today. In 2021 a buyer put in about 45 percent of the price and borrowed the rest; now the buyer puts in about 56 percent. Less borrowing means buyers can pay less for companies.

A growth equity deal usually carries no debt, so nothing changes on the way in. What changes is the exit: whoever buys the company in a few years will borrow at that day's rate and pay less because the loan costs more.

Hidden trouble. Moody's counts the true rate of trouble on loans held by investment funds at 4.7 percent, against a reported 1.6 percent. The gap is loans extended or rewritten rather than declared in default. About one loan in ten now lets the borrower add unpaid interest to the balance instead of paying cash, up from one in sixteen in 2022. New loans are different: lenders are putting the financial tests back in.

Can a company still borrow for an acquisition? It depends. The pipeline of buyout financings is the largest since 2007, but most of it goes to companies adding a smaller acquisition to an existing loan, or refinancing. A new loan for a software company that charges per user is hard to get at any price, because lenders cannot predict its revenue once customers use AI to do the work. A company with steady customer retention in a regulated market can borrow this month.

Funds. Morgan Stanley raised $1.3 billion for its first growth equity fund — the bank that advises a company on its funding rounds, IPO and sale will now also invest in it. CVC raised $10 billion for its sixth secondaries fund, nearly twice the last one, as record amounts of investors want out before funds sell their companies. In BDO's survey of 400 US private equity managers, 82 percent expect prices to rise because there is more money to invest than quality companies to buy.

In life sciences, four investors combined Kincell Bio and Cellipont into one company manufacturing cell therapies for drug developers — with biotech unable to go public, investors are buying the businesses that make the medicines. In data centers, as much as $80 billion of debt financings sit in the queue; lenders want a long lease with a tenant like Microsoft or Amazon and a confirmed grid connection.

A panel of executives and investors at Foley's Silicon Valley office on Monday — including Jason Babcoke of Sumeru, Rob Bartlett of Jefferies, Harish Belur of Riverwood and Gargi Ray of Synopsys — concluded that waiting is not really an option, because a company is never standing still. Their sharpest point: a sale process does not begin when the board hires a banker. From the day a company takes outside money, buyers are watching. Every quarter's results, every customer that renews or leaves, every senior hire and departure is information someone is collecting.

Anderson v. Intel, on what an employee must show to sue over private investments in a 401(k) plan, is argued at the Supreme Court on October 6. The answer decides how much litigation risk stands between private equity and retirement money.