Jurisdiction(s):
United Kingdom

Key definition

Private equity definition

What does Private equity mean? Private equity describes investment by professional funds in unlisted (unquoted) companies to obtain minority or controlling stakes, financing growth, management buy-outs/ins, recapitalisations or turnarounds, often alongside acquisition debt. The shares acquired are not admitted to trading on a stock exchange, so are less marketable and less liquid than public (quoted) equity. The term is not defined in legislation or case law; it is a market description used consistently across England & Wales, Scotland, Northern Ireland and Ireland. Transactions are privately negotiated and typically documented through investment and shareholders’ agreements, amended articles, preference shares or loan notes, management incentive arrangements (such as...

UK private equity ratchets: VC anti-dilution and buyout performance structures, triggers, mechanisms and HMRC/BVCA tax considerations

Published by a LexisNexis Corporate expert

Practice notes

Within Private equity, a Ratchet is a mechanism that adjusts the proportion of Equity held by founders, managers and employees following investment.

In a venture capital setting, Ratchets operate as anti-dilution protections, safeguarding early-stage investors from dilution where later fundraisings are completed at a lower entry price than before.

In a buyout setting, they are typically designed to reward management; the percentage of overall equity they own may shift according to how the business performs against forecasts and projections and against the investor’s target return. In such cases, strong performance usually increases management’s shareholding.

Ratchet structures can differ markedly from one investment to the next. They frequently rely on complex financial and mathematical constructs and must take account of multiple scenarios, including different exit routes and the form of consideration used.

Tax effectiveness

Managers benefiting from ratchet provisions will want them structured to be as tax efficient as possible. The difficulty is that, on an exit, the slice of proceeds received by managers can be far higher than their percentage ownership, which may lead to part of the proceeds being treated as income rather than purely linked to shareholding...

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Web page updated on 21/05/2026

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