Private equity gambles on earnouts to close exit deals

The amount tied up in deferred payments in private equity exit deals is increasing as fund managers turn to earnouts to narrow the buyer-seller divide that has been slowing M&A.

In the year to Oct. 31, the value of private equity and venture capital exit deals with an earnout component totaled $51.32 billion, higher than any annual total going back to at least 2018, according to S&P Global Market Intelligence data. But the exiting funds likely will never realize all that value.

Deals with earnouts require buyers to pay only a portion of the purchase price at closing, linking future payments to the target's ability to hit performance benchmarks. M&A advisory SRS Acquiom Inc. found that just 21% of the aggregate maximum earnout potential was paid when it analyzed 100 recently closed M&A deals in 2024, excluding transactions in the life sciences sector, where earnouts are common.

Earnouts can delay but rarely resolve buyer-seller disputes over valuations, said Kimberly Petillo-Décossard, co-head of law firm White & Case's global M&A practice.

"They tend to get very ugly down the road," Petillo-Décossard said.

Narrowing the divide

Across all sectors, M&A transactions with earnouts globally from January to October totaled $142.39 billion, already higher than any full-year total since 2021, Market Intelligence data shows.

White & Case's Petillo-Décossard tied the prevalence of earnouts in 2025 to global M&A markets' hangover from the buying frenzy in 2020 and 2021, when valuations were high and acquirers were willing to pay up. The 2022 run-up in inflation and interest rates deflated valuations, opening a persistent buyer-seller divide.

"Sellers still have one expectation and buyers all of a sudden want to do a reset," Petillo-Décossard said.

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Mismatched views on valuations also slowed the pace of private equity exits, leading to mounting pressure on fund managers to sell portfolio companies and return the profits to their limited partners.

Daniel Kozin, a partner in White & Case's M&A practice with a focus on private equity transactions, said fund managers typically avoid earnouts, preferring a "clean break" with portfolio companies and certainty regarding the value they deliver for limited partners. Earnouts do not provide that certainty.

"Where I've seen earnouts, it's really the underperforming assets," Kozin said.

Getting creative

Earnouts may help private equity funds close deals at a time when trade conflicts are clouding the macroeconomic outlook, consultancy EY suggested in its third-quarter update on global private equity activity, which noted an uptick in earnouts and other "creative" deal structures.

"This flexibility has allowed sponsors to maintain transaction momentum even as long-term macro questions remain unresolved," EY noted in the report.

Earnouts were a component in 60 private equity exit deals through Oct. 31 this year, compared with 62 deals in all of 2024, according to Market Intelligence data.

The acquisition by Novartis AG of biopharmaceutical company Anthos Therapeutics Inc., which is backed by Blackstone Life Sciences and Novo Holdings A/S, was the largest private equity exit with an earnout component announced as of Oct. 31. The terms called for Novartis to pay $925 million up front, with up to $2.18 billion in additional payments linked to the company's main product — a potential treatment for blood clots — achieving regulatory and sales targets.

The largest non-life sciences M&A deal that features a private equity or venture capital seller agreeing to an earnout was Allwyn International AG's pending acquisition of a majority stake in fantasy sports operator Performance Predictions from an investor group that included Atlanta Technology Angels, AMJ Ventures, The Players' Impact Global Inc. and Phoenix Capital Ventures. The exiting funds agreed to $1.6 billion up front, plus a $1 billion earnout.

Kip Wallen, a senior director at SRS Acquiom, said earnout negotiations are trending longer as the parties spend more time crafting detailed, bespoke agreements. Even so, it remains "rare" that a full earnout is achieved, Wallen said.

"Earnouts are fraught with post-closing disputes. It's very, very common that you're going to end up back at that negotiating table," Wallen said.