2020 marked a turning point in the reinvestment requirements of investors, with a general trend towards higher percentages driven by high valuations and a requirement to bridge gaps between buyers and sellers, particularly in the last couple of years. The average percentage for 2025, 42% (net of proceeds and tax), represents a slight shift downwards from 2024, but nevertheless a high commitment from management teams in the context of what was traditionally a range of 25% to 50%.

The average sweet equity pot decreased slightly to 13% on mid-upper European focused deals. However, pot sizes do depend on: (i) the size of the deal; (ii) the amount of shareholder debt including the coupon applicable to it; and (iii) the dynamics of the management team. Transactions at the smaller end of the spectrum typically saw larger sweet equity pots of up to 22%, while the largest deals may have a sweet equity pot size as low as 5%. Outliers usually result from larger transactions or where the sponsor is outside of Europe, notably the US, where management are typically not offered as favourable terms and there is a more limited management advisory market. 

The use of ratchets has declined slightly since 2024, with ratchets featuring on 42% of deals.

Ratchets are typically being used as a tool to bridge expectation gaps between sponsors and management regarding the size of the sweet equity pot. In the higher inflationary and interest rate environment of recent years, sponsors have been more cautious in their growth projections for investments, especially where acquisition pricing has remained high. Ratchets have allowed sponsors to incentivise management teams to drive exceptional performance whilst not having to sacrifice returns where growth is in line with more conservative projections. We expect to see this trend continue throughout 2026 given uncertain market conditions caused by geopolitical events and the continued difficulty of aligning expectations between management teams and price conscious investors.

The amount of additional equity available in excess of the hurdle typically ranges from 2% to 15% on mid-upper European focused deals, with most ratchets involving a money or invested capital multiple test and, often, an additional IRR test. Whilst in recent years ratchets were almost exclusively "top slice" ratchets (where additional equity is calculated by reference to the proceeds above the relevant hurdle only), we have seen more ground up or "cliff" ratchets (where additional equity is calculated by reference to all proceeds) in 2025. Whether this becomes a new trend remains to be seen.

Other features of sweet equity terms remained consistent. A vast majority of sponsors agreed that the pot should be ring-fenced for the benefit of management only (meaning that unallocated shares are either issued at nil cost prior to an exit or used to pay transaction bonuses). How much of the sweet equity pot (if any) can be allocated to independent non-executive directors and chairs remains a point for negotiation with market practice varying significantly between sponsors and depending on transaction specific dynamics.

Preference shares continue to be the predominant form of shareholder debt in 2025, with a significant majority of transactions using preference shares as the only fixed coupon instrument. A small number of deals used both preference shares and loan notes with an even smaller number using loan notes alone. Preference shares are now favoured by US fund investors as they can receive poor tax treatment on loan notes in the US. Limitations on the tax deductibility of loan note interest as a result of the corporate interest restriction and anti-hybrids rules also make loan notes generally less attractive than they once were. Transactions utilising a blend of preference shares and loan notes are often with the aim of facilitating the extraction of cash without any requirement for distributable reserves, which can be a particular concern if the AIFMD asset stripping rules apply, or where bridging financing is required, for example whilst the terms of senior third-party debt are finalised.

Although central bank interest rates marginally declined over the course of 2025, continued macroeconomic uncertainty caused by tariffs implemented by the current American administration meant that pricing of external debt remained relatively high. As such, the most used shareholder debt coupon remained high, at 12%, reflective of the desire of investors to protect their own returns against high rates lower down the capital structure. Annual compounding of interest remains by far the most common, rather than semi-annual or quarterly compounding.

2025 saw a continued decline of guaranteed non-dilutive funding to 15% of transactions.

Whilst non-dilutive funding is often a key way for sponsors to differentiate themselves in competitive processes, particularly for businesses with a strong M&A platform, the less competitive nature of processes in 2025 meant many sponsors did not feel compelled to offer this as part of their bids or favoured other incentives to management such as ratchets. Ongoing uncertainty over the cost of capital also meant sponsors did not want to hardwire future funding arrangements and instead preferred to agree appropriate terms at the time it is required.  

Sweet Equity

The good leaver, intermediate leaver, bad leaver and very bad leaver construct continues to be the most prevalent method for valuing a leaver's sweet equity. Although many sponsors have preferred house positions, the consistency with which leaver terms have been set up across transactions suggests that a standard position has emerged in the current market over the past few years, with advisers typically spending the most time negotiating the application and consequences around the edges, such as very bad leaver terms.

A vesting period of four years remained the most common by far, often with cliff-edge vesting at the one-year anniversary of acquisition (where management receive the full 20% for that year on such anniversary) and linear or monthly cliff-edges thereafter. Vesting linked to an exit (where management are only entitled to receive full value for their sweet equity if they remain with the business until exit) also remained the most commonly adopted approach. Value vesting (rather than ownership vesting) also remains the standard on European deals.

The most common method of pricing sweet equity shares held by leavers in 2025 continued to be: (i) fair market value for shares held by good leavers and for vested shares held by intermediate leavers; and (ii) the lower of issue price and fair market value for shares held by bad leavers and for non-vested shares held by intermediate leavers. More aggressive terms were reserved for sweet equity held by very bad leavers, who in some cases saw their sweet equity holdings valued at £1 in aggregate, notwithstanding any value which may have been created in the business since they acquired those shares, reflecting the seriousness of the category.

Strip Equity

The use of "very bad leaver" provisions which apply to strip equity in limited circumstances continues to be the market standard in 2025. Very Bad Leaver provisions were seen on 86% of transactions in 2025, compared to 85% of transactions in 2024 and 80% for 2023.

As a category, very bad leaver is a relatively newer development and, as the name suggests, reserved for the most serious leaving circumstances. A manager can expect to be a very bad leaver if they: (i) breach their restrictive covenants; or (ii) are convicted of fraud or another serious criminal offence. In some cases, material breach of confidentiality provisions is also included in the category.

The consequences when leaver provisions are applied to strip equity can include some or all of: forfeiture of some or all of the ordinary equity component, reduction of future coupon accrual or, on some transactions, forfeiture of accrued coupon.

Sponsors are also deploying more sophisticated contractual terms as part of the leaver arrangements, such as: (i) liquidity tests before paying certain classes of leaver in cash, with an option to satisfy the relevant purchase price by way of loan notes; (ii) clawback mechanics to facilitate the return of value in the event that a leaver is reclassified, for example where they have breached restrictive covenants; and (iii) where a leaver is permitted to retain shares, capping the proceeds attributable to those shares on a return of capital at the amount the leaver would otherwise have been entitled to receive at the time of becoming a leaver.

The most common duration for the restrictive covenants given by Tier 1 management remained at 24 months in 2025, in line with the previous two years. The most common length for Tier 2 management remained the same, at 12 months. Occasionally distinctions were made between the non-compete and other covenants, the former having a shorter period applied.

The scope of investment agreement warranties has remained relatively unchanged in recent years, with key members of management typically being asked to warrant (on a several basis) certain factual information in the core due diligence reports and personal questionnaires. The purpose of these investment warranties is primarily to elicit disclosure and focus the minds of key members of management, rather than to achieve substantive financial recourse. Consequently, the caps on liability remain at 1 – 2x the manager's salary, with most deals in 2025 adopting a 1x cap. Where bonuses form a material component of a manager's remuneration, these were sometimes taken into account in the negotiation of the relevant limitations. The most common time period for these warranties was 12 months, which was adopted on over 80% of transactions. The second most common time period was 18 months, which was seen on a small minority of deals.

The use of limitations also continues to expand (e.g. blanket awareness, de minimis, thresholds and no double recovery) and are increasingly akin to SPA limitations.

A similar number of deals involved arrangement fees, exit and refinancing fees and monitoring fees as in 2024. The quantum of such fees also remained relatively unchanged and continues to be largely driven by the terms agreed between a sponsor and its limited partners, rather than market conditions. Notably, in some particularly competitive processes where management have a powerful negotiating position, usage and quantum of fees can end up being a decisive factor.