Control mechanisms are terms agreed upon between the PE firm and managers of portfolio companies for a PE fund which align the interests of portfolio managers with the private equity firm’s interests.
Most simply, compensation of managers of the portfolio are closely linked to the company’s performance, with bonus clauses for achieving company goals. Tag-along, drag-along rights force potential acquirers of a company to extend the acquisition offer to all shareholders including management.
The PE firm has board representation if the portfolio company experienced a major event, and non-compete clauses are common in the industry. PE firms receive priority in distributions, and changes of strategic importance require PE firm approval. Earn-outs tie the acquisition price paid by the private equity firm to the portfolio company’s future performance over a specified time period.