Knowledge
How management teams reinvest and earn outsized upside — sweet equity, the institutional strip, ratchets and leaver provisions.
Last updated 4 July 2026
In brief: In a buyout, management typically reinvest part of their proceeds (rollover) and subscribe for a thin slice of ordinary shares — sweet equity — that is cheap because the institutional investor's money goes mostly into preference shares and shareholder loans. That structure gives management leveraged upside if the deal performs, which ratchets can widen and leaver provisions can claw back.
When a private equity fund buys a business, the existing management team is usually asked (or required) to roll over a portion of the proceeds they receive from the sale into the new holding structure. Rather than taking all their money off the table, they reinvest alongside the incoming fund. Rollover aligns incentives: management now hold equity in the same NewCo the fund controls, and share in the outcome of the next few years.
Sweet equity is the slice of ordinary shares that management subscribe for, typically at nominal or low value. It is "sweet" because it carries disproportionate upside relative to the cash management put in. The reason lies in how the fund structures its own investment.
The fund does not put all its money into ordinary shares. The great majority goes into the institutional strip — a combination of preference shares and shareholder loans that carry a fixed return and rank ahead of the ordinary equity. Only a small fraction of the total is invested in ordinary shares, alongside management.
Because the strip must be repaid first, with its accrued return, before the ordinary shares receive anything, the ordinary shares are worth very little at completion — so management can buy a meaningful percentage of them cheaply. But once the strip is satisfied at exit, the ordinary shares capture the residual upside. A modest cash outlay can therefore translate into a large payout if the business grows and deleverages.
| Layer | Held by | Return profile |
|---|---|---|
| Shareholder loans | Fund (institutional strip) | Fixed interest, repaid first |
| Preference shares | Fund (institutional strip) | Fixed coupon, repaid before ordinaries |
| Ordinary shares | Fund + management (sweet equity) | Residual upside after the strip |
A ratchet adjusts the split of ordinary equity based on performance. If the deal returns more than an agreed threshold — often measured by the fund's money multiple or internal rate of return — management's share of the ordinary equity increases, rewarding them for outperformance. Ratchets can be structured as extra shares issued to management, or as a re-allocation of proceeds within the equity waterfall, and are frequently implemented through separate alphabet share classes (Ordinary A, B, C) that vest or convert on different terms.
Because sweet equity is tied to management's continued involvement, subscription documents include leaver provisions governing what happens to a manager's shares if they leave before exit:
Sweet equity, ratchets and leaver provisions all sit in the ordinary share classes at TopCo or HoldCo, and every one of them changes who owns what at exit. A cap table that models only the headline percentages — without accounting for the institutional strip ranking ahead of the ordinaries and any ratchet that reshapes the split — will misstate management's true economic position. Because CapTab derives ownership from the underlying transactions and instrument terms, the effect of the strip and the ratchet on each class is reflected automatically.