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Key Considerations for Private Equity Sponsored Long Term Incentive Plans

Key Considerations for Private Equity Sponsored LTIPs

Investors entrust their funds to Private Equity (PE) firms with the primary aim of increasing the value of their investment. As Fund Managers, PE firms are saddled with the responsibility of investing in profitable portfolio companies, ensuring safety of investors’ funds and surpassing expected rates of return.

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Boluwaji Apanpa

Senior Manager, Compensation & Benefits

KPMG in Nigeria

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To achieve their objectives, PE firms typically leverage Long Term Incentive Plans (LTIPs) that provide management and other key employees the opportunity to share in the success and value that they help to create. This serves to inspire commitment and performance.

LTIPs are pay plans used to reward performance over a period longer than one (1) financial year, usually three (3) to five (5) years. There is an increasing trend of PE-sponsored LTIPs in portfolio companies, as PE firms continue to emphasise the need for alignment of interest of key employees to investors’ objectives. For most LTIPs, eligibility is usually restricted to Senior and Executive Management employees, and, in some cases, high performing / critical roles on lower levels. LTIP benefits are tied to achievement of predetermined Key Performance Indicators (KPIs), usually linked to the investors’ objectives. Examples are increase in Equity Value / Share Price of the portfolio company and profitability measures such as Earnings Before Interest Tax, Depreciation & Amortisation (EBITDA), Profit BeforeTax, Return on Equity, et cetera.

There are various types of LTIPs available to PE firms for motivating and retaining management and other talent that will help achieve their growth agenda.

Click to download and find out the various LTIPs available to PE firms and also read more on this article.

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