Legal Lingo: What is a private equity 'corporate stack'?

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts leading to an often impenetrable wall of jargon for students and trainees. Next up in our Legal Lingo series, which we've introduced to help break down this jargon, is an explanation of what a private equity ‘corporate stack’ is.

A private equity ‘corporate stack’ typically consists of multiple layers of holding companies, commonly (but not always) referred to as ‘Topco’, ‘Midco', ‘Midco 2’ and ‘Bidco'. This structure is used in private equity (PE) deals to acquire a target company and facilitate the re-investment by manager shareholders:

• Topco is the parent company of the stack, often majority owned by the PE fund with a minority shareholders basis comprising of the management team of the underlying business. 
• Midco and Midco 2 sit between Topco and Bidco and serve as intermediate holding companies.
• Bidco is the acquisition vehicle that directly purchases the assets or shares of the target company.

Reasons for using the stack

This tiered structure is used for several reasons:

• Financing flexibility: A multi-tiered structure allows PE firms to layer different forms of debt (e.g., senior debt, mezzanine debt) and equity at various levels. Bidco typically takes on the majority of acquisition debt, while Midco might issue subordinated debt. This structuring can reduce the overall cost of raising capital.
• Risk management: The stack isolates financial and legal risk. By placing debt at different levels (e.g., Midco or Bidco), any liability or failure to meet obligations can be contained within a specific entity without necessarily affecting the other parts of the structure or the PE investors and management team directly. If the target business underperforms, the liabilities stay with Bidco or Midco, protecting Topco and its investors.
• Alignment of interests: By holding different equity and debt instruments in various layers of the structure, the interests of investors and management can be better aligned. For example, where management hold shares in Topco this will act as an incentive for them grow the business which in turn grows the value of the shares.

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