Private Equity and the increase in “MIPs”

March 21, 2024

Over the past year, the most frequent area of discussion for the private equity team here at MM&K with our clients has been around managing, changing and implementing “MIPs”.  This article sets out more details about MIPs and their increased use.

  • What is a MIP?

Taking it down to its roots, a MIP is the acronym for a “Management Incentive Plan” – and it may be tempting to think that they are the equivalent of “LTIs” (Long Term Incentives) in listed businesses.

However, whilst a LTI will often be settled in shares/share options, one of the key features of many MIPs is that offering equity may be difficult due to cost or unavailability and, therefore, other instruments may need to be considered.

Alternatively, the term MIP is used when the investors in a business cannot or simply do not want to offer “sweet equity” to management and require an incentive structure which has an alternative performance metric to company value.

  • Why more MIPs?

In our experience, there are a number of potential reasons for the increase in the use of MIPs, including:

  • A desire to make sure management teams do not benefit through “value inflation” created by outside circumstances as has happened in other businesses (often termed the “Persimmon effect”).
  • Longer growth cycles meaning that company value may not track internal business activity and success.
  • Longer sales cycles (due to investors holding assets longer in order to get better sales prices) making existing incentive plans for management less valuable.

Whatever the reason for needing a MIP, putting one in place requires balancing commercial, regulatory and tax needs – as well as making sure that discussions around the MIP do not interfere with running the business (or, even worse, de-motivate management).

Should you want someone to help you explore your thinking on this issue or help you design and implement your own MIP, please contact Stuart James in the first instance.

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