Ballis: Reverse breakup fees became ubiquitous in PE buyouts after 2005
Jon Ballis · Jon Ballis – In the Room Where Private Equity Happens at Kirkland & Ellis (Capital Allocators, EP.277) · Oct 24, 2022 · at 33:50
Jon Ballis, Chairman of Kirkland & Ellis, outlines how debt financing conditions transformed into reverse termination fees in leveraged buyout transactions.
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“Until 2005, the way deals worked is that the private equity sponsor would say, I'd love to buy your business for a hundred dollars, but I'm borrowing 50 dollars, and if I can't get my mortgage, I've got a mortgage contingency in my contract, and there was a debt financing condition, and if I couldn't get my money, I'd walk away. No one liked to do that. It was reputational issues, but there was no financial aspect to it. In 2005, that heyday, then the huge deals like SunGuard and HCA, big club deals, multi-billion dollar deals, that shifted. And what happened is that the sellers, the targets said, no, no, no, I'm not signing up for this with a debt financing condition. If you do get your mortgage, I can force you to close. This is the part I'm really getting at. If you don't get your mortgage, it's going to cost you a pretty penny. And that's referred to today as a reverse termination fee, a reverse breakup fee. It's become ubiquitous where if the buyer, the sponsor, can't get its debt financing, they owe a fee to the targets.”
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