Management Rollover

Rollover achieves two critical objectives for PE sponsors. First, alignment of incentives: if management has meaningful equity at stake in the new entity, they are motivated to maximize value over the holding period. Second, reduced equity requirement: if management rolls $50M of a $200M equity check, the sponsor only needs to fund $150M. Typical rollover ranges from 20-50% of management's pre-deal equity, though this varies by deal and management's negotiating leverage.

Management typically rolls equity into the same class of stock as the sponsor or into a slightly different instrument. The rollover is structured as a tax-deferred exchange — management doesn't pay capital gains on the rolled portion until the next exit. Key terms include rollover percentage, vesting conditions (if any), tag-along and drag-along rights, and the management equity plan (options or co-invest) layered on top of the rollover. In the sources and uses, rollover appears as a source of equity alongside sponsor equity.

From the sponsor's perspective, rollover improves IRR by reducing the equity check while maintaining the same enterprise value upside. If a deal exits at the same MOIC, the sponsor's dollar return is smaller but their IRR is identical (or higher due to less capital deployed). From management's perspective, rollover creates significant upside: if the PE firm doubles equity value, management's rolled equity also doubles. However, management bears downside risk — their rolled equity could be wiped out in a bankruptcy.