A ratchet is a value-sharing adjustment mechanism between a private equity fund and management in an LBO or growth transaction, conditioned on the achievement of defined performance targets — IRR, money multiple or EBITDA level. If targets are exceeded, management's share of the equity (sweet equity) increases at the fund's expense (ratchet up); if targets are missed, it decreases (ratchet down). The ratchet is a central element of the management package — aligning management's economic interests precisely with the fund's value creation objectives.

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Example: in an LBO, management holds 10% of equity with a ratchet up triggered if fund IRR exceeds 25% — above this threshold, management's share increases to 15%. At an exit realising 28% IRR, management receives 15% × (exit value - debt) = CHF 5.25 million on CHF 35.0 million equity proceeds — versus CHF 3.5 million without the ratchet. This incentive mechanism can represent millions of additional francs for the management team.

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Hectelion models and structures ratchet mechanisms in LBO structuring and management packages to optimise alignment between management and investor value creation objectives.