{"id":23754,"date":"2021-11-24T07:37:34","date_gmt":"2021-11-24T07:37:34","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=23754"},"modified":"2026-05-06T20:41:29","modified_gmt":"2026-05-06T20:41:29","slug":"control-mechanisms-in-private-equity-transactions","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/","title":{"rendered":"Control Mechanisms in Private Equity Transactions"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which item is least likely to be included in a private equity term sheet?\",\r\n    \"text\": \"Which of the following choices is least likely to be contained in a private equity term sheet?\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"Earn-outs that ensure portfolio firm manager compensation.\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Tag-along, drag-along clauses.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Earn-outs that ensure portfolio firm manager compensation.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A clause that guarantees private equity firm membership on the portfolio firm board.\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/qw-HAUAz7Vw\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p>In most private equity firms, the businesses, their ownership, and control are concentrated in the same hands. Private equity firms can also increase control if any venture capital investee firm does not meet specified targets.<\/p>\r\n<p>The following clauses can be contained in a contractual agreement. They explain how private equity firms ensure that the management team is encouraged to achieve the set business plans.<\/p>\r\n<h3><strong>Compensation<\/strong><\/h3>\r\n<p>The reward offered to managers of portfolio firms is closely linked to a firm&#8217;s performance. The reward contract encompasses sections that encourage the achievement of a firm&#8217;s business targets.<\/p>\r\n<h3><strong>Tag-along, Drag-along Clauses<\/strong><\/h3>\r\n<p>Anytime an investor obtains control of a firm, the investor must extend the acquisition offer to all shareholders, including the management of the firm.<\/p>\r\n<h3><strong>Board Representation <\/strong><\/h3>\r\n<p>A private equity firm guarantees control through board representation when a portfolio firm undergoes a significant event, e.g., a takeover, restructuring, initial public offering (IPO), bankruptcy, or liquidation.<\/p>\r\n<h3><strong>Noncompete Clauses<\/strong><\/h3>\r\n<p>Company initiators should always agree with management on clauses that stop them from competing within a predefined period.<\/p>\r\n<h3><strong>Priority in Claims<\/strong><\/h3>\r\n<p>Private equity firms receive their returns on investments before other shareholders. This is especially applicable to preferred dividends and, it is at times, specified as a multiple of the original investment. They also have priority on a firm&#8217;s assets during a portfolio firm\u2019s liquidation process.<\/p>\r\n<h3><strong>Requisite Approvals<\/strong><\/h3>\r\n<p>The private equity firm must approve strategic importance changes (e.g., acquisitions, divestitures, and business plan change).<\/p>\r\n<h3><strong>Venture Capital Earn-outs<\/strong><\/h3>\r\n<p>Earn-outs link the purchase price paid by a private equity firm to the portfolio company&#8217;s future performance over a specified period, generally between 2-3 years.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following choices is <em>least likely<\/em> to be contained in a private equity term sheet?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Tag-along, drag-along clauses.<\/li>\r\n\t<li>Earn-outs that ensure portfolio firm manager compensation.<\/li>\r\n\t<li>A clause that guarantees private equity firm membership on the portfolio firm board.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>Earn-outs do not ensure portfolio firm manager compensation since they tie the acquisition price paid by private equity firms to the portfolio firm\u2019s imminent achievements. These are principally common in venture capital investments.<\/p>\r\n<p><strong>A is incorrect.<\/strong>\u00a0Tag-along, drag-along clauses are primarily included in a private equity term sheet.<\/p>\r\n<p><strong>C is incorrect.<\/strong>\u00a0The private equity term sheet typically includes a clause that ensures private equity firm representation on the portfolio firm board.<\/p>\r\n<\/blockquote>\r\n<p>Reading 38: Private Equity Investments<\/p>\r\n<p><em>LOS 38 (b) Explain how private equity firms align their interests with those of the managers of portfolio companies.<\/em><\/p>\r\n<ol><\/ol><!-- \/wp:post-content -->","protected":false},"excerpt":{"rendered":"<p>In most private equity firms, the businesses, their ownership, and control are concentrated in the same hands. Private equity firms can also increase control if any venture capital investee firm does not meet specified targets. The following clauses can be&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[562,102],"tags":[],"class_list":["post-23754","post","type-post","status-publish","format-standard","hentry","category-alternative-investments","category-cfa-level-2","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Private Equity Control Mechanisms | AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Private Equity Control Mechanisms | AnalystPrep\" \/>\n<meta property=\"og:description\" content=\"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-11-24T07:37:34+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-05-06T20:41:29+00:00\" \/>\n<meta name=\"author\" content=\"AnalystPrep Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"AnalystPrep Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/\"},\"author\":{\"name\":\"AnalystPrep Team\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"headline\":\"Control Mechanisms in Private Equity Transactions\",\"datePublished\":\"2021-11-24T07:37:34+00:00\",\"dateModified\":\"2026-05-06T20:41:29+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/\"},\"wordCount\":419,\"articleSection\":[\"Alternative Investments\",\"CFA Level II Study Notes\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/\",\"name\":\"Private Equity Control Mechanisms | AnalystPrep\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"datePublished\":\"2021-11-24T07:37:34+00:00\",\"dateModified\":\"2026-05-06T20:41:29+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"description\":\"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/control-mechanisms-in-private-equity-transactions\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Control Mechanisms in Private Equity Transactions\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\",\"name\":\"AnalystPrep Team\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"caption\":\"AnalystPrep Team\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/author\\\/analystprep-team\\\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/qw-HAUAz7Vw\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2588\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-11-24T07:37:34+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Private Equity Control Mechanisms | AnalystPrep","description":"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/","og_locale":"en_US","og_type":"article","og_title":"Private Equity Control Mechanisms | AnalystPrep","og_description":"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2021-11-24T07:37:34+00:00","article_modified_time":"2026-05-06T20:41:29+00:00","author":"AnalystPrep Team","twitter_card":"summary_large_image","twitter_misc":{"Written by":"AnalystPrep Team","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/"},"author":{"name":"AnalystPrep Team","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"headline":"Control Mechanisms in Private Equity Transactions","datePublished":"2021-11-24T07:37:34+00:00","dateModified":"2026-05-06T20:41:29+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/"},"wordCount":419,"articleSection":["Alternative Investments","CFA Level II Study Notes"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/","name":"Private Equity Control Mechanisms | AnalystPrep","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2021-11-24T07:37:34+00:00","dateModified":"2026-05-06T20:41:29+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"description":"Learn control mechanisms used in private equity transactions, including governance rights, control investments, and transaction structures.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/control-mechanisms-in-private-equity-transactions\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Control Mechanisms in Private Equity Transactions"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e","name":"AnalystPrep Team","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","caption":"AnalystPrep Team"},"url":"https:\/\/analystprep.com\/study-notes\/author\/analystprep-team\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/qw-HAUAz7Vw","og_video_type":"text\/html","og_video_duration":"2588","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-11-24T07:37:34+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/23754","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=23754"}],"version-history":[{"count":13,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/23754\/revisions"}],"predecessor-version":[{"id":43324,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/23754\/revisions\/43324"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=23754"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=23754"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=23754"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}