2.13 Some of the Department's interests, as owner of QinetiQ, were different from management's. The Department was aware of these differences and had agreed a memorandum of understanding with management in 2001, the purpose of which was to ensure that management acted in the best interests of the Department as a shareholder and to enhance the value of any future transaction. The Department did not want management to make very large returns simply by virtue of the privatisation. It was content, however, that there should be a share scheme to incentivise management to increase the value of the equity so long as the returns made by management were proportionate with the growth in the value of the business. The Department's interests also differed in some respects from those of the private equity bidders. Such bidders want to buy the equity as cheaply as possible. The Department's decision to sell a minority stake helped to mitigate the impact of any undervaluation of the business as it ensured the Department would also benefit from the resulting growth. Private equity bidders also have no interest in restricting management returns as long as they were linked to their own returns; the Department considered its interests were fully aligned with bidders in this respect.
2.14 Apart from initially ensuring that management are competent and have a credible business plan, the main objective of a financial investor is to structure a deal so that management are incentivised to maximise the value of the business in the short to medium term. Typically, management will be offered the opportunity to invest their own money in an equity stake in the business. Sometimes this is structured with a ratchet mechanism that can increase the return significantly, subject to certain performance targets. The choice of target will depend on the main focus of the investor, for example, growth in equity value or growth in profitability.