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Capital Markets

How Culs might ease the pain

Using convertible unsecured loan stock (Culs) along with cash could help different types of deals break the impasse between existing shareholders and bidders.

In an example like the first failed bid for Debenhams in July by Blackstone, Goldman Sachs and Permira, where a fairly full price was offered but institutional shareholders were unhappy with the decision to take the company private in principle, those shareholders could elect to receive 20% to 30% of the bid in the form of carried interest instruments.

Where a target company's share price has fallen so low that institutional shareholders are unwilling to sell despite a nominally high premium, they could elect to take a much greater proportion of carried interest instruments. An example is 3i's failed attempt to acquire Nestor Healthcare. In this case talks were broken placed their pensions in the hands of a long-only equity fund manager have done so because they want to take on only conventional risk. Clients might not want private-equity exposure. It is the job of pension fund trustees to decide if they want to allocate their money to private equity, not the job of the conventional equity portfolio manager. And if trustees do want private-equity exposure, they will probably want private-equity experts to choose the deals for them, not long-only fund managers that only dabble in the sector occasionally.

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