State of Private Equity in 2026

Posted on by

Private equity investments were considered selective last year, with price being an apparent issue mitigating against deal flow.   Perhaps also a lack of sufficient cash-outs constrained available capital. Optimism prevailed at the start of 2026, although to me there did not seem to be any objective indicator.  And indeed through the 26th of June, it was reported that over 3,600 PE deals totaled over $735 billion.

But according to several leading PE attorneys, as reported in the Law360 information service, a sense of caution prevailed, characterized by one as a “strangeness in the market.”  It seems that different opinions as to enterprise value was a major factor.  The impacts of this factor are these: use of co-investment vehicles, more roll-overs for some seller equity, and an increase in earnouts (see my June 30 post as to earn-out usage).  Buyers are using their leverage in fixing such structuring.

There is also activity by secondary funds creating liquidity for prior investors, so-called “continuation funds.”  Whether such activity will in turn free up capital to drive new investments is unclear to me, however.

While real estate and defense deals seem to be robust (no surprise as to the latter given state of the world), current anticipation seems to be continued calm in the second half of the year.  One reason may have to do with the elections, in my view, a point not noted in the reportage.  Perhaps people are just unsure about a large number of things, and that leads to inertia.

 

 

Tenth Man on Your Board of Directors

Posted on by

This month’s issue of Directorship (the publication of  National Association of Corporate Directors) discusses the necessity of having a “tenth man” in the board room when discussing complex matters with substantial risk wherein the board promptly has granted approval.

Boards are admonished the have a person with the obligation (after such approval) to challenge the result.  Not to be argumentative, the task is to inquire if the board has asked the right questions in reaching such decision.  Such approach is said to keep the conversation civil and not adversarial, inducing discussion of assumptions, risks not discussed, impact of failure, risk of oversimplification.

Lest one person become seen as an annoyance and not a team player, it is recommended that the chair rotate the role, so it is understood as an analytical tool and not the encouragement of a person who relishes conflict.

Unanswered is the metric for determining that a decision had been reached too quickly without full analysis.  This seems to me a subjective game-time call.  The board chair in this scenario needs quickly to exercise judgment as to speed of decision, question of whether alternatives were considered, and perhaps most importantly whether (since every idea has the risk of failure) a wrong decision would be “too expensive” in terms of P&L or the closing down of alternative approaches.

While not one to argue with the NACD (particularly being advisory to the New England Chapter), I did get a chuckle out of a passing comment in the same article: “Consider a board discussion on adopting agentic artificial intelligence where alignment around a well-reasoned functional recommendation from a director came quickly.”  Seems AI now is welcome in board deliberations?  The idea has facial logic, I suppose.

And finally, why am I offended by the invented worded “agentic”?  I guess progress carries its own nomenclature….

EEOC Formally Eliminates Affirmative Action

Posted on by

Monday the US Equal Employment Opportunity Commission formally deleted support materials permitting affirmative action in cases where it was deemed appropriate to overcome past or present barriers to equal opportunity in employment.  This action is not unexpected; it is a logical extension of Republican administration policy, premised on the idea that every individual in America should be treated equally and thus without a leg-up on any basis.  The EEOC took this action without public hearing, cancelling a hearing originally scheduled for today.

This action was taken over the dissent of the sole Democratic member of the Commission, who also objected to the cancellation of the meeting.  But the result was clearly coming, based on emerging Supreme Court and lower court case law.

The regulatory basis for the deleted provisions dated from 1979 and 1981; forty-seven years of US policy now has been stricken from the books.  Seems to me two issues are presented.  The first is the stated conclusion: is the Supreme Court in fact correct that the Constitution should be read as establishing a legally neutral playing field in the face of clear historical  bias operating in the marketplace?  The second is this: assuming historically there was bias in the marketplace thus denying equal rights to minority citizens, have facts evolved over the past decades so that today such de facto bias does not exist?  If the second conclusion is correct, then while the EEOC action seems to revoke a clearly useful and correct standard, its deletion is without practical effect.

If you are cynical about the current state of the marketplace, then the action of the EEOC is regrettable.  I am not smart enough to speak definitely as to the facts on the ground.  I wonder who is….

M&A: Trends in earn-outs and reps/warranty insurance

Posted on by

Interesting trends have popped up relative to the use of earn-outs and insurance against seller misrepresentations in acquisition practice.  (Tip of the hat to the firm of SRS Acquiom which provides shareholder services in such transactions and periodically reports on M&A trends.)

Earn-outs: for the uninitiated, an earn-out defers payment of the purchase price for a company until a future time, and the amount (if any) of such deferral is based on the post-closing economic performance of the acquired company.  As can be seen immediately, this can be dangerous for the seller; an acquirer can be tempted to down-play immediate success when good results means more has to be paid to the seller.  These arrangements are more typical of larger deals but occur about a fifth of the time even at the lower end of reported transactions.

What can be written in a contract to provide realistic protection for the seller if there is an earn-out?  Solutions include agreements by the purchaser: to act in good faith in running the acquired business (a vague standard); to run the business as in the past (not a likely result as the buyer will want to adapt the business to its own management style, or merge it into existing operations); to take no action with the intent to minimize future earnings (hard to prove what is in someone’s intentions); to operate to maximize profits (buyer’s independent business judgment might drive the opposite rational business goal, for example to revamp for long-term profitability or to integrate a business into internal product flow).  In any event, proving any one of these fact patterns is, to say the least, not easy.

Without descending to great detail, in practice the percentage of potential earn-out dollars actually paid is very little.  Possible take-away for many sellers, in my view: avoid pie-in-the-sky possible future windfalls and trade earn-out for as many dollars as you can negotiate up front.

Warranty and representation insurance: these are insurance policies to indemnify a purchaser for damages suffered when a business seller has misrepresented (willfully or not) as to salient facts about the business being sold.  When I started practicing law, admittedly decades ago, this was not common and indeed if I recall correctly not even available in the dim dark past.  Today, such insurance was purchased in 76% of reported acquisitions by venture capital firms and 34% of cases involving strategic buyers.  I suspect this reflects the likelihood that a strategic buyer possesses greater knowledge of the details of a related business being acquired while capital investors are at greater risk by reason of not being in a similar business.   Deal negotiations here revolve around whether insurance is purchased, who pays for it, and whether the seller remains on the hook for any damages arising from incorrect representations for amounts in excess of insurance limits.  Note that in about 80% of all cases the sellers are left on that hook.

These deal realities lead to the practice of a hold-back of purchase price to cover, among other matters, any such  misrepresentations.  Part of the purchase price is placed in escrow, often covers mechanical costs of winding up the transaction, but also is held to cover misrepresentation injury to the buyer.  Sellers often must decide whether they are better off buying insurance or suffering a holdback of funds in an escrow fund.

Each deal of course is different in substance and motivation.  Particularly in strategic deals the final deal model is unpredictable.  With private equity, not so much– when the buyer is not intimately knowledgeable about a given space, the buyer is much harder to deal with.  Be ready to be asked: “Aren’t you sure of your representations?  You are making me nervous about this deal if won’t stand behind the business you are asking me to purchase.”

Regulation of Prediction Markets

Posted on by

To my mind, few things make less sense than the regulatory status of the prediction markets.  A very new phenomenon, prediction contracts first were regulated by various forms of State regulation, toyed with by the SEC and then came under the self-proclaimed jurisdiction of the US Commodity Futures Trading Commission, a jump in logic which I report without comment.  Of course now the States and the Feds are fighting and suing over who’s in charge here.

Let me predict, with admittedly no special information or insight but noting the current appetite for Federal regulation loosely applied in all instances, that the Feds are going to end up as the regulator to be dealt with.  In any event, on June10 the Feds sent to the White House a 250 page proposal for regulation of the prediction market, and also released that proposal to the public.

The proposal itself is very fluid, asserting CFTC control and stating that it “preliminarily believes” that markets hinging on outcomes of professional and collegiate sports events are permissible under federal law, except for contracts that settle on player injury or outcome of officiant’s calls or involve Little League games.  It is suggested that contracts need to demonstrate they are free of manipulation and are resolved based on verifiable criteria; MLB, NBA and PGA all responded that settlement of contracts should reflect league data.  There is express request for regulatory suggestions that preserve for Fintech firms the ability to be creative in enhancing access to these derivatives, and in integrating digital asset technology.

Those who decry the professionalization and commercialization of sports, particularly at the collegiate level, marked by compensation of athletes by Universities and the movement of better athletes among different school programs to prime them for millionaire contracts in the pros, no doubt will decry that added commercialization.  Those who fear manipulation by athletes at all levels for purposes of obtaining returns on bets similarly will be unhappy.  But the combination of public appetite and Federal bias in  favor of “free markets” in every area will doubtless create a permanent betting universe easily accessed by most would-be players.  Add the emergence of prediction markets to the already constant harping of sports betting sites on television, often during televised sporting events, and the free market will brings us a host of optimistic losers.

And note: prediction contracts are not all about sports; you will be able to open a contract on just about anything– for example how many thousands of people will read this post in the next few days…..

 

 

Cannabis Status Revisited

Posted on by

First, I find that many people do not understand the status of recreational cannabis.  It is Federally within Class 1 and thus is not legally available, according to clear reading of Federal law.  Since it may nonetheless be available under State law and since the Feds do nothing about it, it is a matter of “no blood no foul.”

What IS legal federally? Two things have been made available by reclassification in April from Class 1 to Class 3: FDA-approved drugs; and, products containing  marijuana subject to a state-issued medical license.  (This reclassification covers certain [but not all] extracts and derivatives if within the foregoing categories). There are a few other subsets of cannabis and hemp also remaining outside Class 3; as is always true with respect to my posts, they are general and do not constitute legal advise and cannot be relied upon as such, something particularly important to remember with respect to a technical scientific differentiation as herein.)

What comes next–eg when if at all will recreational cannabis per se become nationally available by reclassification to Class 3?  The DEA announced in April that it would hold expedited hearings starting on the 29th of this month (June) to consider possible reclassification of recreational cannabis; so hold the phone.

Changes in Rating of Banks

Posted on by

Banks are evaluated by a Federal Council staffed by several other agencies, including the Federal Reserve Bank.  The existing bank rating criteria, in effect in current form for thirty years, considered capital, asset quality, management quality, earnings, liquidity and exposure to market risk.

Proposed new guidance, being suggested by the Federal Council, moves away from this general analysis and focuses not on what may seem abstractly undesirable, but rather  focuses on what in fact creates material financial risks to safety and soundness.  Inter alia, the new framework removes consideration of management depth and succession per se as extraneous and not necessarily bearing on current risk.

Further, the current ratings consider reviews of information technology, consumer compliance and compliance with the Community Reinvestment Act in evaluating management; these evaluations under new guidance will be irrelevant unless they can be related to an actual current material risk to bank soundness.

I now note a theme in the above regulatory approach that may be an undercurrent in the regulatory approach of the current Federal Administration.  My immediately prior post noted that the SEC proposal revising regulation of public company climate disclosure, to eliminate reporting of what might be considered socially undesirable factors if these factors did not in fact create a current risk or weakness in the public company involved, took the same approach as these bank rating criteria: do not need to report things that may seem facially “bad” top some people, but only report what has current material detriment to the entity involved in the instant report.

This trend reflects, I suggest, an effort to remove general social critiques reflecting an intrusive liberal disclosure philosophy from government-mandated disclosure or consideration.  Regulation should not reflect policies which call for disclosure by, or intrusion into the affairs of, private business unless current material problems exist.  While this approach may offend liberal sensibilities, there is some logic to such a close definition of the proper role of government under libertarian principles.

SEC Regulation of Greenhouse Gasses

Posted on by

In 2024 the SEC adopted a rule requiring robust reporting of emissions of greenhouse gasses by public companies.  The current SEC, under this administration, does not enforce this extant requirement; the rule itself has engendered various lawsuits claiming that the required disclosures are too costly and complex and that, in any event, the SEC is over its head in trying to address this technical area.

It should be noted that general disclosure rules require disclosure in prospectuses and periodic filings of all matters that are material to the business and profitability of a public company.  The 2024 regulations did not rely on such elements of materiality, however.  The driver was  that climate damage is per se important to understand, and thus disclosure required information about emissions of gasses in the chain of production even if no environmental damage was apparent or palpable.

Last week the SEC has announced that it is seeking repeal of the 2024 disclosure requirements, noting that the rule fell outside the SEC’s “core mandate.” This is an administrative process and so will take time, with mandatory two month public comment period; but the impact of this SEC effort is not today of great importance in that, again, the old rule is not being enforced and reporting is spotty by public companies.

Further and an aside simply reflecting the nature of current politics, one Republican SEC Commissioner gratuitously opined that the old rule reflected efforts of special interests to weaponize the securities law for “their own climate-related goals.”

There is in fact initial facial logic to the elimination of a rule that is not being enforced.  And the proposed action, to its credit, does not eliminate the disclosure requirement where current impact is being felt.  It address, in effect, the elimination of reporting for matters that may harm the environment but not the company.  However, the issue is a bit more subtle.

First, investors may be of the belief that current corporate practice does not create a current  material impact on the value of company shares, but might well believe that over time there will be economic impact which might affect investment judgment and timing.  Second, and I see this with investment policies of non-profit entities and some socially conscious individuals, there are some investors who just do not want to invest in companies with a pollution profile.  Are not these constituents entitled to disclosure as part of the SEC mandate?

Outcome is pretty clear: the rule will be killed by the Republican-controlled SEC.  Perhaps private watchdog entities will try to fill this gap; or, erhaps in the future the ebb and flow of political power will reverse what is about to happen.

Mailing Tax Checks

Posted on by

I find many clients are not aware that at some point in the foreseeable future the IRS will require that Federal tax payments be sent on-line.  We today await guidance on this mandate, although it is fair to anticipate a period of time in which taxpayers can become acclimated.

It  also is today possible to pay on line, and doing so avoids issues of lost checks and saves the now-increased postage for certified, return receipt submissions. However, and not to appear to be elitist about this, I am not sure how this new rule will play with folks who are at the lower end of the economy.  It may be that electronic financial transactions are not part of their normal tool kit.  If I am selling my fellow citizens short, I beg forgiveness…..

Among matters presently noted by the IRS: you can pay without charge from your bank account but if you use a credit or debit card, or pay out of your digital wallet, there is a processing fee (excepting payroll tax remittances); and, for those paying off a tax debt under a payment agreement, the forms appear to permit scheduling a stream of payments at one time.

For those having returns prepared by accountants, of course the mechanics will be made simpler with help at hand.  For all others, the game will change in the foreseeable future as society moves its very existence on line…..  Perhaps AI will facilitate the mechanics here?

AI and other Legal Developments: Part One

Posted on by

Every Monday I peruse the legal press to see what’s new, interesting, important. Sometimes it is  M&A or capital markets.  But this Monday’s mailbox was full of interesting stuff.

Posts are supposed to be short revelations, not long rambles– SO let me take these one at a time and let me start with AI. (Posts in the next day or two will reach taxation, cannabis, SEC climate disclosure and government ratings of banking institutions.)

The State of Florida has today instituted litigation against Open AI and Sam Atman, in Florida State court.  The claim is that Chat GPT is harmful to users and that the company ignored safety warnings.  Accusations, according to  the State Attorney General, include violation of product liability laws, negligence, deceptive and unfair trade practices.  The State seeks civil recovery and a ban on collecting data from children under 13 without parental consent.

This follows a pending criminal investigation by the State exploring the use of Chat GPT in the Florida Sate University mass shooting.  And, the daily press often contains reports of claims of risk from AI generally, proposed litigation to prevent misuse in spoofing posts (some relating to sexually explicit usage), theft of literary and artistic and musical works, etc.

Whether the current administration has the intent to step into an AI regulatory role, given the sweep of litigation and general fearfulness of AI, not to mention the recent Papal announcement concerning who “owns” AI, remains to be seen.  It is no secret that, generally speaking, the present US government is not inclined to regulate industries in most regards so– stay tuned.

Sardonic aside: I just used Chat GPT to inquire about the status of the widely rumored proposed public offering of Altman’s company, wondering what the prospectus might say about the risks involved, and the liabilities arising, from the dissemination of an AI platform such as Chat.  FYI: it is still a rumor, no formal public action towards going public having been taken.  If and when it does happen, the disclosures in the prospectus will make remarkable reading.