< PreviousINDEPENDENT SPONSOR TRANSACTION DEAL STUDY 10 While McGuireWoods has seen many examples of complex waterfalls with many hurdles, the survey results demonstrate that independent sponsors and their equity investors are most often limiting their waterfalls to two or three hurdles, with 42% of deals using variable MOIC hurdles having three hurdles and 24% of deals using variable MOIC hurdles having two hurdles. Further illustrating this inclination to keep the waterfall relatively straightforward, only 8% of deals using variable MOIC hurdles used four hurdles and only 4% of deals using variable MOIC hurdles having five or more hurdles. Deals using variable IRR hurdles had an even stronger tendency to limit the number of hurdles to three or fewer hurdles. In the vast majority (91%) of transactions using MOIC hurdles, the first hurdle was set between 1.0 and 2.0 MOIC. The most common carry percentages to the independent sponsor after achieving the first hurdle ranged from 10% to 14.99% (representing 45% of transactions using MOIC hurdles), with a carry percentage ranging from 15% to 19.99% (representing 22% of transactions using MOIC hurdles) also a common result. 70% 17% 13% Carried Interest Hurdles – MOIC vs. IRR Hybrid IRRMOIC22% 45% 16% 3% 2% 12% Carried Interest Distributions After First MOIC Hurdle INDEPENDENT SPONSOR TRANSACTION DEAL STUDY 11 < 5% 5% – 9.99% 10% – 14.99% 15% – 19.99% 20% – 24.99% > 30% After the first hurdle, each subsequent hurdle is typically 0.5 to 1.0 MOIC higher than the immediately preceding hurdle and the carry percentages to the independent sponsor typically increase by 5% to 10% per hurdle. Only in a relatively small number of deals (32%) was the highest hurdle greater than 3.0 MOIC. In the majority of transactions surveyed, the carry percentage to the independent sponsor after achieving the second hurdle ranged from 20% to 24.99%. After achieving the third hurdle, the carry percentage to the independent sponsor was relatively evenly distributed from 20% to 30%. In our experience, the highest carry percentage is heavily influenced by the quality of the deal and competitive tension reached in the independent sponsor’s negotiations with the equity investors. Some independent sponsors focus on the higher-return scenarios and spend fewer “negotiating chips” on the lower-return scenarios.INDEPENDENT SPONSOR TRANSACTION DEAL STUDY 12 In many transactions, after achieving each hurdle, the independent sponsor receives a “catch-up” to the higher carried interest percentage associated with such hurdle based upon prior distributions of profits. The survey responses revealed that the vast majority of independent sponsor transactions are structured with catch-ups. Specifically, 73% of transactions had a “full catch-up,” meaning that upon achieving a hurdle, the independent sponsor was caught up to the new carried interest percentage implied by the newly achieved hurdle, with the catch-up calculation taking into account all profits from the first dollar of profits. An additional 11% of transactions had a “partial catch-up,” meaning that either (1) the independent sponsor does not catch up to the first dollar of profits, or (2) upon achievement of a hurdle, the independent sponsor receives an increased portion of distributions but does not fully catch up to the higher carried interest percentage back to the first dollar of profits. The survey shows that 16% of transactions had no form of catch-up. In our experience, the catch-up often is not adequately clarified at the term-sheet stage despite being essential to understanding the terms of the carried interest. 11% 16% 73% Catch-Up to Independent Sponsor Prevalence of Catch-Ups No Yes, full Yes, partial3% 3% 5% 4% 8% 17% 58% 1%1% INDEPENDENT SPONSOR TRANSACTION DEAL STUDY 13 Carried Interest Straight-Percentage Model Straight-Percentage Model – Carried Interest Percentage to Independent Sponsor < 5%5% – 9.99%10% – 14.99% 15% – 19.99% 20% – 24.99% 25% – 29.99% 30% – 34.99% 35% – 39.99% > 40% • Note: This chart does not relate to the (more prevalent) variable-with-hurdles model. PERCENTAGE OF DEALS % OF DISTRIBUTIONS TO INDEPENDENT SPONSOR Of the transactions surveyed, 39% used the straight-percentage model. Those transactions tended to have a larger number of equity investors, who were more likely to be family offices and high-net-worth individuals rather than private equity or mezzanine debt funds. This is consistent with our experience, as it is not uncommon for “pass the hat”-style equity financings to use the straight-percentage model due to simplicity and negotiating dynamics as well as historical acceptance of the model. More than half (58%) of the transactions that used the straight-percentage model had a carried interest percentage to the independent sponsor equal to 20%. This is consistent with the traditional “two and twenty” private equity model. Only 10% of the transactions that used the straight-percentage model had a carried interest percentage greater than 20% and only 15% of such transactions had a carried interest percentage less than 15%.INDEPENDENT SPONSOR TRANSACTION DEAL STUDY 14 Broken-Deal Costs Conclusion In the majority of the transactions surveyed, equity capital providers agreed to pay some or all of the broken-deal costs (i.e., the transaction fees and expenses if the transaction did not close). This is even more common in control buyouts in which a control private equity investor is the independent sponsor’s primary equity capital partner. In such transactions, the control private equity investor was responsible for all of the broken- deal costs in 61% of transactions. In only 21% of such transactions was the independent sponsor responsible for 25% or more of the broken-deal costs. In smaller transactions and transactions with many equity investors, it was more common for the independent sponsor to be responsible for some or all of the transaction fees and expenses if the transaction did not close. In these circumstances, independent sponsors are “staging” workstreams and otherwise selecting service providers that are true partners in helping them grow their firm. In recent years we have witnessed continuously growing success of independent sponsors in the private equity market – both in the number and size of transactions being consummated. Indeed, the independent sponsor segment of private equity has become a separate asset class with its own set of market terms and norms. As that market continues to develop and the underlying economic environment changes, we intend to publish additional deal studies reflecting the evolution of the independent sponsor marketplace. In the meantime, please do not hesitate to contact McGuireWoods for best-in-class advice for your independent sponsor transactions. of control private equity-backed buyout transactions was the independent sponsor responsible for or more of the broken-deal costs. In only [21%] [25%]INDEPENDENT SPONSOR TRANSACTION DEAL STUDY 15 Contact Info JEFF BROOKER, PARTNER +1 214 932 6417 jbrooker@mcguirewoods.com 2000 McKinney Avenue Suite 1400 Dallas, TX 75201 JON W. FINGER, PARTNER +1 214 932 6404 jfinger@mcguirewoods.com 2000 McKinney Avenue Suite 1400 Dallas, TX 75201 GREG HAWVER, PARTNER +1 312 750 2788 ghawver@mcguirewoods.com 77 West Wacker Drive Suite 4100 Chicago, IL 60601-1818 A video recording of the discussion of our survey results led by McGuireWoods private equity partners Jeff Brooker and Greg Hawver at the October 2021 McGuireWoods Independent Sponsor Conference in Dallas can be viewed on YouTube. For further insights on independent sponsor issues and transactions, please listen to McGuireWoods’ independent sponsor podcast "Deal-by-Deal", hosted by private equity partners Jeff Brooker, Greg Hawver and Rebecca Brophy, available on YouTube and the McGuireWoods website as well as Apple Podcast and Amazon . For additional resources and thought leadership related to independent sponsor transactions as well as information on the industry-leading annual McGuireWoods Independent Sponsor Conference in Dallas, please visit independentsponsorconference.com. Legal Disclaimer: The data summarized in the Deal Study is subject to limitations with respect to the collection and presentation thereof, including the accuracy of the survey respondents in reporting such data. McGuireWoods LLP makes no representation as to the accuracy of the data summarized in the Deal Study or this paper. The authors have attempted to present the data in the most useful and accurate format for its intended audience. The written analysis in this Deal Study represents the views of the authors and not the views of McGuireWoods LLP. This Deal Study is not legal advice and does not form any attorney-client relationship between any recipients thereof and McGuireWoods LLP. Please consult with legal and tax professionals before negotiating and/or entering into any transactions (or any letters of intent describing the terms thereof).1,100 lawyers | 21 offices | www.mcguirewoods.comNext >