Primary Integration LLC: Lower-Middle-Market Investment Harvard Case Solution & Analysis


Primary Integration is a professional services company that is engaged in data center commissioning along with various other performance certifications. Its main business is based on commissioning mission critical data centers that sustains necessary government and business functions that are extremely important for them as the failure would be a big loss for both the parties. The company is organized into three primary business units that are PI solutions, PI energy and ILM. Commissioning is the process through which they are reviewing and testing of the system just to make sure that the installations and design could be operated and maintained to the required standard of performance. PI solutions contributed 70% of the total 2011 profit, PI energy includes 25% of the total gross profit and ILM includes 5% of the company’s gross profit in 2011.

Rotunda Capital Partners, founded as a private equity firm in 2008 and whose primary activities include making investments in debt and equity capital in a proper established lower middle market that is profitable as well. The composition of middle market is based on a value range between $25 million to $1 billion. The trend towards lower middle market has increased in recent years as the market has grown from 41% of the deals to almost 58% by the first quarter of 2012.

Problem Statement:

The main issue faced by the company is the death of  Shawn Till’s partner Zaimi, who was the founder of primary integration LLC PI. He was the early builder and successful data developer in need for the funds for the estate. These funds will be given on a personal guarantee of Zaimi but after his death, Till had no personal guarantee left. Thus, Till approached Rotunda Capital Partners (RCP) that was a private equity firm. The firm offered to give $5 million for a 25 % stake in the firm. However, being a minority shareholder, he has some concerns because of the limited control they will have in the company. Moreover, lack of control forced RCP to put some terms and conditions to negotiate with Till so that their exit with an investment can be done properly.


Qualitative analysis:

A minority shareholder is the one who does not have equal or greater rights than the third party. The issue creates in circumstances when the management needs to take some quick decision about the company like selling of any asset or the change in ownership. In these scenarios, minority shareholder’s opinions, views and votes don’t count. These scenarios generally happen in small companies where the investment has been done by the close members of family or friends.

Minority Interest:

As mentioned before, the investment made by RCP will be of minority interest and thus, RCP paid close attention to minority rights it would receive in the deal. Normally, venture capitalists frequently took minority stakes in their portfolio companies, private equity firms rarely made minority investments. Despite having a minority stake, minority stakeholders also have some rights as well. RCP had negotiated substantial minority rights in the deal. Till and Decker could choose to run the company indefinitely and thus, RCP has the right to put it’s shares back to the company at the end of year six for the greater of fair market value or the accrued return. In addition to this, the minority stakeholder RCP has Veto rights as well that is based on preventing Primary Integration from engaging in any of the activities mentioned below without informing and getting approval of RCP. First, the company cannot sale, lease, transfer, exclusive license or other forms of disposition of a company’s assets. Second, the company cannot change the  control of the company that might include any consolidations or mergers. Moreover, PI is not allowed to do any liquidation, dissolution or winding up of the company without RCP’s consent.

In addition to this, the company is also not allowed to make any acceleration of material indebtedness. Finally, the company cannot file for bankruptcy or similar things without RCP’s approval. Moreover, the company would also receive a management fee of $125,000 at closing along with the equity interest of the company. Further, RCP would also receive a 20% carry with a preferred rate of approximately 8% per annum on invested capital.....................

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