What do you do if investors in Private Equity deals can't agree on strategy?

In most cases, the initial investment documents (such as pitch decks, PPMs, subscription agreements, term sheets, etc.) already outline the investment strategy, ensuring that potential investors are fully informed before participating in the fund. When this is not the case, the decision on investment strategy will be made by the deal maker, GP, investment committee, or majority stakeholders as specified in the governing documents, if investors cannot come to an agreement.

Recommendation: Understand Issues Listen Carefully: Hear out each investor’s concerns. Channel your inner therapist. Identify Roots: Pinpoint the conflict’s core. Whether it’s company direction, fund allocation, or exit strategies. Recognize Objectives: Understand each party's goals. Everyone’s got their own wishlist. Work Toward Resolution: Address all interests. Find the win-win in the situation. This approach helps you resolve conflicts effectively and keeps everyone on the same page.

There are a number of factors to understand that may drive potential solutions in a situation where the GPs have a disagreement on deal strategy. 1) The economic terms of the deal may solve a lot of the issues here. Does one GP have voting control in the deal or more board of directors representation? 2) How are dispute resolutions stipulated in the corporate governance docs for the company (e.g. the CEO has certain authority, the board or specific committees have certain authority, etc.) 3) Are the GPs aligned on the ultimate objective (e.g. driving growth, exiting at an attractive price, etc.)? If the end goal is aligned, GPs may be more likely to reach a constructive agreement or compromise. 4) What does the management team think?

Understanding the root issues in any disagreement is key. Start by actively listening to each investor’s concerns and objectives. Identify underlying causes, whether it's about company direction, fund allocation, or exit strategies. Recognize that these core issues often have emotional and strategic layers. Engage in empathetic dialogue to explore these dimensions fully. By addressing both the surface-level and deeper concerns, you can work towards resolutions that align with everyone’s interests, fostering a more collaborative and trusting environment.

If investors can't agree on strategy, one approach is to consult the Limited Partnership Agreement (LPA) that governs the Private Equity fund, which typically details the rights, responsibilities and decision-making procedures of the investors. The LPA might contain clauses regarding dispute resolution methods. The Companies Act 2006 and the Partnership Act 1890 offer guidance on governance and decision-making processes These laws outline the responsibilities of directors and partners ensuring that decisions are made in the interests of the company or partnership. Case law like Re Duomatic Ltd [1969] 2 Ch 365 provides insights into resolving conflicts between shareholders and partners within private equity arrangements.

Encouraging open dialogue between investors is crucial for resolving strategy disagreements. Create a structured setting where each investor can share their perspectives openly and constructively. Utilize a neutral facilitator to guide these discussions and ensure every voice is heard. Incorporate anonymous feedback mechanisms to gather honest insights that might not surface in group settings. This approach not only fosters mutual respect and understanding but also uncovers innovative solutions that might be overlooked in a more rigid structure. Emphasizing continuous, transparent communication builds a stronger, more unified investor community.

Recommendation: Encourage Dialogue Facilitate Meetings: Organize discussions for investors to voice opinions. Think of it as a corporate therapy session. Promote Openness: Ensure everyone feels heard and respected. No interrupting—everyone gets their turn on the mic. Seek Compromises: Encourage suggestions for potential compromises. A little give and take goes a long way. Foster Collaboration: Create a collaborative environment. Teamwork makes the dream work. This approach helps align interests and resolves disagreements amicably.

If direct dialogue doesn't resolve the issue, seeking external mediation can be a game-changer. Here's how to proceed: Recommendation: Seek Mediation Hire a Mediator: Find an expert in private equity mediation. Think of them as the referee in our financial game. Gain Impartial Insight: Benefit from their unbiased perspective. Fresh eyes can see clearer paths. Break Down Issues: Let the mediator simplify complex problems. They’re the financial problem-solvers. Facilitate Solutions: Work towards a mutually beneficial strategy. Aim for a win-win resolution. This approach can effectively bridge gaps and lead to a satisfying outcome for all parties.

When considering the majority viewpoint, it's also vital to implement a structured review process where minority investors can voice their concerns and suggestions. This helps ensure that the final decision is well-rounded and considers diverse perspectives. Additionally, periodic evaluations of the decision's impact can help address any unforeseen consequences and maintain trust among all investors. This approach not only promotes fairness but also enhances the decision-making process by integrating broader insights and maintaining investor confidence.

Alternative options will always be available. Time may play a crucial aspect in the decision making process (as is typically the way), by offering alternatives you are essentially still providing a solution driven approach. Ensure validity and they align with the funds values and mechanics, and look to understand how they are different from your first offering.