Hi, Can someone please explain the difference between Ratchet and ‘Tag Along Drag Along’. I don’t think it’s particularly well explained in the readings. Thanks for any/all help!
Tag Along Drag Along gives management right to buy equity stake when PE owners sell. Rachet specifies the equity allocation bw management and limited partners. Found it in the practice exams.
I am going on this purely from memory, and how I understood… so please correct me if I am wrong. Tag along / Drag Along when a potential future acquirer acquires a portfolio company - it must make the same offer to the existing shareholders, including management. It must “tag along” the shareholders and “drag-along” the mgmt. This provides an incentive to the mgmt of the PE Controlled company that they will not be left in the lurch in the case of a future sale, and give the company their all, so it performs as desired. Ratchet - is allocation of equity between the shareholders and mgmt team of the PE controlled company.
adding to the above Tag along/drag along is like a Piggy-back Clause. Ratchet is what the above said and that the allocation to the management can be increased based on the company’s (controlled company) performance.
Drag along is normally a right for the majority owner (normally the PE fund) to “drag along” minority shareholders (normally mgnt) into a deal to sell the company to a third party. This is to ensure that mgnt does not oppose a deal to sell THE WHOLE company that the PE finds it acceptable. Tag long is normally a right for the minority owner (normally mgnt) to “come along” with the majority shareholders (normally PE fund) into a deal to sell the company to a third party (at the same price offered to the majority owner) THis is to ensure that the majority owners does not cut a private deal that leave mgnt high and dry (minority shares are normally worth less because of lack of control) See otherwise. http://www.analystforum.com/phorums/read.php?12,1126400,1126512#msg-1126512
freakingout Wrote: ------------------------------------------------------- > Tag Along Drag Along gives management right to buy > equity stake when PE owners sell. > management right to buy equity stake when PE owners sell. I believe it is call ‘First right of refusal’ which entitles one partner to buy the other’s stake before any third party. I.e., if PE fund wants to sell its stake, it has first offer to sell it to mgnt first. If mgnt refuses to buy, then PE fund can go and sell it to other (with same price as first offered to mgnt).