Steve Weiss’ Post

LBO Mechanics – Understanding the structure and the debt game Leverage Buyouts (LBO) involves a financial sponsor (mostly a PE) acquiring a target using a high proportion of debt and a smaller contribution of equity LBO typically works like this 1) The PE firm will raise a fund (ex. Industrials Opportunities Fund V), financed by third party investors (LPs) 2) Such fund will be the majority owner of a holding company (Newco) 3) The newco will own 100% of the target company acquired via LBO (Opco) 4) The PE firm’s representatives on the board of the Newco and/or target company will have their say on key decisions (hire a new CEO, decide top management compensation, etc.) 5) Any given fund may own dozens of different target companies, via an equal number of newcos or directly under the PEs ownership On implementation date of the LBO: 1) The newco must pay the purchase price for the shares of the target to the sellers and the transaction costs to the advisors 2) The opco must repay the existing debt to the lenders (often a condition imposed by new lenders who want to hold most of the debt lent to the group) 3) The newco will be funded equity from the PE fund, management team (in MBOs) and debt from banks typically in a proportion that skews towards higher value of debt compared to equity 4) The newco will pay the purchase price of the target along with the transaction costs, and lend to the opco so it can repay its existing debt 5) Cashflows of the opco are primarily used to repay the debt installments which increases the ownership of the PE given the reduction of debt in the overall capital structure of the opco Learning the nuances of LBO helps an analyst to cover many concepts under one umbrella and these techniques can be applied to other fund raising, valuation and M&A projects. Related posts 1) 3 reasons why LBO is the mother model for any Investment Banking Professional https://lnkd.in/gZh_qqWt 2) LBO - The need & the Drivers of the LBO model https://lnkd.in/d-qZER5u 3) LBO - The Ideal and NOT so ideal candidates https://lnkd.in/g-NQ7F7d ------------------------------------------------------------------------------------- Learn practical investment banking I am starting the next batch of my Live Investment Banking program at Wizenius - Be Deal Ready from July 14th. Drop in your details and get a free call from me (Link in the comment section)

While debt capital is pretty straightforward, there is a lot of flavour in the equity. ✓ Growth phase - A company starts with capital from the family's savings, gradually moving to Venture capital/ PE firms for growth capital. Beyond a point, owners don't want to dilute their shareholding for further capital. And lenders won't lend to young growing company which is still burning cash. At this stage, convertible debt is best suited which has lower cost than debt and also gives equity flavour to the investors. Nowadays when interest rates are high, convertible bonds are an appealing option for corporations as well for its low interest rate and option to be repaid in stock rather than cash. They also get tax shield on coupon payment. The only drawback from equity shareholders perspective is dilution in their shareholding after conversion. ✓ Stable phase - Once a sizable valuation has been achieved, the company knocks the door of public shareholders and raises funds through straight equity issuance to the public shareholders. As the company further grows, its internal cash flow generation accelerates which becomes the primary source of growth capital. It is the best and most preferred option to fund growth. When internal cash generation is insufficient, the corporate raises funds through rights issues to existing shareholders or warrants to a wider set of investors. ✓ Degrowth phase - Troubles invariably come in the life of a corporate. As companies face distress, they issue preferred shares which are mezzanine financing: sitting between debt and equity. Investors are promised a particular yield which are paid out before dividend to shareholders. It is generally cumulative: the investors, while running the risk of not receiving preferred dividends during the bad years, get priority in claims to cash flows (if the company starts making money) and can use the conversion option, if the firm's market value also climbs. However, it is like an expensive debt instrument as dividends are paid from after tax profit and there is no tax shield. Financial service firms are generally lured towards preferred stock as regulatory authorities generally include preferred stock in equity for capital ratio. Thus, by looking at the company's equity capital, you can find out whether the company is in early growth stage, stable or in financial trouble.

ARG Capital Launches Private Credit Initiative Global private debt fundraising increased by ~4.4x to $192 billion in 2021 from $44 billion in 2010, reflecting the increased interest of institutional investors. Middle-market companies, particularly those owned by PE sponsors, are the most common borrowers of direct lending, accounting for nearly 60% of overall private debt fundraising in 2021, exceeding $100 billion. Additionally, more than $500 billion of existing debt at middle-market companies will mature between now and 2026 and will need to be refinanced, further increasing the significance of private debt financing. Private debt is expected to continue to grow, with AUM reaching $2.7 trillion by 2026 from $1.2 trillion in 2021, overtaking real estate, second in AUM only to PE/VC by the close of 2023. The recent high interest environment has been favourable for public debt and money market investors but with rates expected to drop in 2024 those days will soon be over and fixed income investors will need to look to private credit markets if they want to achieve attractive real returns from fixed income investments. In view of these factors ARG Capital is pleased to launch a slate of private credit opportunities with interest rates of 8% per annum in connection with our ongoing luxury hotel and real estate developments in South East Asia. DM me if you’re a private lender or private credit broker and want to find out more.

Private equity groups struggling 😩 with the hefty debt loads of their holdings says Moody’s "In a new analysis, the agency indicated that recent increases in interest rates have put the assets held by some of the world US’s fastest-growing PE groups under strain. It said more than half of the companies in the portfolios of Platinum Equity and Clearlake Capital Group, both Los Angeles-based, are at heightened risk of default, with a rating of B3 or below. Moody's said the holdings of Clearlake, a co-owner of ⚽️ Chelsea Football Club, and Platinum had the highest leverage ratios of the firms it surveyed, while others had begun to reduce their debt loads. The two groups have attracted tens of billions of dollars in recent years from top institutional investors in North America, transforming them from niche middle-market firms into dealmaking powerhouses. 😮 While Clearlake grew from about $1bn in assets in 2008 to $90bn today, the size of Platinum’s funds has nearly quintupled during that time to almost $50bn in assets. ⚠️ The report found that overall in the two years to August, portfolio companies of the top dozen buyout groups defaulted at a rate of 14.3%, a figure twice as high as that for companies not backed by private equity. Private capital powerhouses including Apollo Global Management, Inc. and Ares Management Corporation have had buyouts suffer. ‼️ Nearly a quarter of the Apollo-owned companies that Moody’s rates have defaulted since 2022, while 47 per cent of Ares-backed companies they follow are distressed, the agency said. ‼️ The industry has been hit by the swiftest interest rate increases in a generation, which brought down valuations that had soared during the pandemic and pummelled the balance sheets of thousands of highly leveraged private equity-backed companies. Between January 2022 and August of this year, more than a third of the Platinum-owned companies rated by Moody’s underwent restructuring or a debt default. 17% of Clearlake’s portfolio suffered the same outcome. Clearlake also became an active user of so-called continuation funds, where the group in effect sells the company to itself and other investors — novel deals that will be tested by higher rates for the first time. 💡The fast-growing market for private credit has impeded rating agencies’ task, since such loans are more difficult to track than more traditional forms of borrowing. ☝️Private credit can 'mask some issues' in a private equity firm’s portfolio, Julia Chursin, vice-president at Moody’s, said in an interview. 'There could be some opaque credit risk which is absorbed by the private credit sector, although they claim they only pick good ones.'" (Financial Times, 10 October 2024) (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

How much debt should serial acquirers take on? The textbook answer is to maximize market value by minimizing the cost of capital. But as straightforward as that sounds, the reality is often complicated by unexpected events and changing macroeconomic and company-specific factors.     The size of the serial acquirer is one of the most important factors to consider. Most serial acquirers should reach a certain scale before justifying using any debt. The reason is that the smaller the serial acquirer, the more vulnerable they are to the performance of an individual company in their portfolio. There’s a huge difference in risk in taking on debt to fund the incremental acquisition for a small portfolio of half a dozen companies, compared to a much larger portfolio of hundreds of companies.    A large serial acquirer may be able to shrug off an acquisition not panning out as expected, but smaller serial acquirers will have sizable exposure to a single company. With less room for error, taking on debt for small serial acquirers amplifies the downside risk should things go wrong. Moreover, because smaller serial acquirers tend to have less experience in making acquisitions, they may also make more mistakes, further exacerbating the negative effects of taking on debt.    Another consideration for smaller and younger publicly traded serial acquirers is the fact they will be valued at lower multiples compared to established serial acquirers due to their size and track record. Until they prove their cash flows and growth rates are reliable, markets will react sharply to any underperformance. It’s not uncommon to see a disappointing quarter for small serial acquirers leading to 20-30% price corrections.    Gone also are the days of near-zero interest rates where capital was easy to come by. With the cost of debt higher than it’s been in over a decade, the margin for error has shrunk significantly, leading many companies to re-evaluate the long-term feasibility of their capital structure.     All these reasons are why it’s crucial to acquire companies that are not as sensitive to economic cycles. Focusing on B2B companies or niches that have the necessary demand, regardless of economic conditions, will provide a solid foundation for a serial acquirer to work from.     Ultimately, how much debt to take on is never as simple as finding the optimal capital structure through a formula.     Sometimes, it’s sensible to capture a great opportunity by being more adventurous and taking on debt. However, for most new serial acquirers, it’s best to be cautious—since one wrong acquisition can put the company in jeopardy. 

How does debt financing work? Can debt financing help with acquisitions? Securing debt capital can be faster than equity financing. How to structure debt financing? Will debt capital work for you? Book a call mikebrette@gmail.com. Discover your options with debt capital. Will debt financing work for you? #capitalraising #debtcapital #privateplacements #equitycapital #acquisitionsfinancing

I see this modeled incorrectly all the time: here's a private equity waterfall with all the details 👇 𝗘𝗻𝘁𝗲𝗿𝗽𝗿𝗶𝘀𝗲 𝗩𝗮𝗹𝘂𝗲 (𝗘𝗩): aka the price/value of the company for sale. 𝘛𝘺𝘱𝘪𝘤𝘢𝘭𝘭𝘺 calculated using the last-twelve-months (LTM) EBITDA multiplied by a "market multiple" (in this example, it was $5.5m x 6.5x (not shown) = ~$35.75m Enterprise Value) (+) 𝗖𝗮𝘀𝗵: We 𝘢𝘥𝘥 the Cash to the EV b/c the Seller gets to keep any cash at closing. Why? Cash reflects value the Seller has created in the 𝘱𝘢𝘴𝘵. So, it's theirs to keep (not the new buyer's) (-) 𝗦𝗲𝗻𝗶𝗼𝗿: Now we start to pay down debt. Just like the value of a house, your "equity" is what's 𝘭𝘦𝘧𝘵𝘰𝘷𝘦𝘳 after you pay the mortgage. In this waterfall, the Senior Debt has "priority" so it is paid down 1st. (-) 𝗠𝗲𝘇𝘇: "Mezz" is short for "Mezzanine" — another type of debt. In this waterfall, the Mezz is "junior" to the Senior Debt, so it is paid down 2nd. = 𝗘𝗾𝘂𝗶𝘁𝘆 𝗩𝗮𝗹𝘂𝗲: All of our debt obligations have been paid off, so now we have "Equity Value," or what's available to be distributed to all equity holders. (-) 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗥𝗼𝗖: "RoC" is an abbreviation for "Return of Capital" Often times certain investors in the deal will hold "Preferred Equity" All this means is these investors are paid out first 𝘣𝘦𝘧𝘰𝘳𝘦 any Common proceeds (but after debt) (-) 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗗𝗶𝘃: This is a "dividend" that is associated with holding "Preferred Equity" Not only do these investors get their capital out first (above), they 𝘢𝘭𝘴𝘰 get something called a "Preferred Dividend" on top of their investment. This is often called the "hurdle" b/c it must be "cleared" before proceeds go to Common. (-) 𝗦𝗽𝗼𝗻𝘀𝗼𝗿 𝗖𝗮𝘁𝗰𝗵-𝘂𝗽 Now that the investor has received all their capital + a preferred dividend, it's time for the PE firm to get their share, or "catch-up" to what has already been distributed. In an 80/20 split, the investor dividend (up to this point) = 80% of the proceeds so far, and the "catch-up" is the other 20%. = 𝗖𝗼𝗺𝗺𝗼𝗻 𝗩𝗮𝗹𝘂𝗲: Finally, we've reached the Common Shareholders. This is everything that is leftover after all our obligations have been paid off. Under this deal, the remaining proceeds get split 80/20 to Investors/PE firm. **Double-check: investors should get 80% of gain, PE firm should get 20% of gain. 𝗧𝗿𝗮𝗱𝗲-𝗼𝗳𝗳𝘀: Senior Debt paid out first = lowest risk, lowest return Common equity paid out last = higher risk, highest return (in theory) **Final Note: The "deal returns" shown here reflect the distribution from a specific transaction, whereas "investor returns" also account for management fees paid at the "fund level," which cover operational expenses and impact the overall net returns seen by the investors. ~~~ 𝗡𝗲𝘅𝘁 𝗦𝘁𝗲𝗽𝘀 ⤵️ Grab my Ultimate Guide to Financial Modeling (107 pages, completely free) in the comments below 👇

I see this modeled incorrectly all the time: here's a private equity waterfall with all the details 👇 𝗘𝗻𝘁𝗲𝗿𝗽𝗿𝗶𝘀𝗲 𝗩𝗮𝗹𝘂𝗲 (𝗘𝗩): aka the price/value of the company for sale. 𝘛𝘺𝘱𝘪𝘤𝘢𝘭𝘭𝘺 calculated using the last-twelve-months (LTM) EBITDA multiplied by a "market multiple" (in this example, it was $5.5m x 6.5x (not shown) = ~$35.75m Enterprise Value) (+) 𝗖𝗮𝘀𝗵: We 𝘢𝘥𝘥 the Cash to the EV b/c the Seller gets to keep any cash at closing. Why? Cash reflects value the Seller has created in the 𝘱𝘢𝘴𝘵. So, it's theirs to keep (not the new buyer's) (-) 𝗦𝗲𝗻𝗶𝗼𝗿: Now we start to pay down debt. Just like the value of a house, your "equity" is what's 𝘭𝘦𝘧𝘵𝘰𝘷𝘦𝘳 after you pay the mortgage. In this waterfall, the Senior Debt has "priority" so it is paid down 1st. (-) 𝗠𝗲𝘇𝘇: "Mezz" is short for "Mezzanine" — another type of debt. In this waterfall, the Mezz is "junior" to the Senior Debt, so it is paid down 2nd. = 𝗘𝗾𝘂𝗶𝘁𝘆 𝗩𝗮𝗹𝘂𝗲: All of our debt obligations have been paid off, so now we have "Equity Value," or what's available to be distributed to all equity holders. (-) 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗥𝗼𝗖: "RoC" is an abbreviation for "Return of Capital" Often times certain investors in the deal will hold "Preferred Equity" All this means is these investors are paid out first 𝘣𝘦𝘧𝘰𝘳𝘦 any Common proceeds (but after debt) (-) 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗗𝗶𝘃: This is a "dividend" that is associated with holding "Preferred Equity" Not only do these investors get their capital out first (above), they 𝘢𝘭𝘴𝘰 get something called a "Preferred Dividend" on top of their investment. This is often called the "hurdle" b/c it must be "cleared" before proceeds go to Common. (-) 𝗦𝗽𝗼𝗻𝘀𝗼𝗿 𝗖𝗮𝘁𝗰𝗵-𝘂𝗽 Now that the investor has received all their capital + a preferred dividend, it's time for the PE firm to get their share, or "catch-up" to what has already been distributed. In an 80/20 split, the investor dividend (up to this point) = 80% of the proceeds so far, and the "catch-up" is the other 20%. = 𝗖𝗼𝗺𝗺𝗼𝗻 𝗩𝗮𝗹𝘂𝗲: Finally, we've reached the Common Shareholders. This is everything that is leftover after all our obligations have been paid off. Under this deal, the remaining proceeds get split 80/20 to Investors/PE firm. **Double-check: investors should get 80% of gain, PE firm should get 20% of gain. 𝗧𝗿𝗮𝗱𝗲-𝗼𝗳𝗳𝘀: Senior Debt paid out first = lowest risk, lowest return Common equity paid out last = higher risk, highest return (in theory) **Final Note: The "deal returns" shown here reflect the distribution from a specific transaction, whereas "investor returns" also account for management fees paid at the "fund level," which cover operational expenses and impact the overall net returns seen by the investors. ~~~ 👋Hey, I'm Chris Reilly, please follow me for expert Financial Modeling tips tailored to the unique challenges of the middle-market.

Attending the second annual Venture Debt Conference tomorrow? Be sure to check out the two sessions below!   First, Brad Pritchard will be on a panel discussing “Venture Debt in the Post-SVB Era”. He will be joined by Troy Zander of Barnes & Thornburg, and David Sabow of HSBC. The session will examine the different circumstances that led to the SVB era, the evolving face of venture debt today, and how to navigate the current venture debt market successfully.   Second, Rachel G. will be doing a Q&A on late-stage venture debt with Peter Lorimer of Betterment. The fireside chat titled “A Borrower’s POV: A Look at Late-Stage Venture Debt” will dive into how borrowers can benefit from late-stage venture debt and why choosing the right partner matters. 

Non-Convertible Debentures (NCDs) are a type of debt instrument issued by corporations to raise funds from the public. Here are some details about secured non-convertible debentures: 1. Secured NCDs: Secured NCDs are backed by specific assets or a charge on the company's assets, which means that in the event of default, the debenture holders have a claim on the specified assets of the company. This provides an added layer of security for investors compared to unsecured NCDs. 2. Interest Payment: NCDs typically pay a fixed or floating rate of interest to the debenture holders. The interest payment frequency, such as annual, semi-annual, or quarterly, is mentioned in the terms of the NCD issue. 3. Maturity Period: NCDs have a specified maturity period, which can range from a few years to several years. At the end of the maturity period, the company is obligated to repay the principal amount to the debenture holders. 4. Credit Rating: Secured NCDs are assigned credit ratings by rating agencies based on the issuer's creditworthiness and the security provided. Higher credit ratings indicate lower credit risk. 5. Listing: Some NCDs are listed on stock exchanges, providing liquidity to investors who may want to sell their NCDs before maturity. Unlisted NCDs are not traded on stock exchanges and may have lower liquidity. 6. Tax Considerations: Interest income from NCDs is taxable as per the investor's tax bracket. Investors should consider the tax implications before investing in NCDs. 7. Redemption: The terms of the NCD issue specify the conditions for early redemption or call options, if any, which allow the issuer to redeem the NCDs before their maturity date. 8. Documentation: Investors should carefully review the offer document, including the terms and conditions, risk factors, and other relevant details before investing in secured NCDs.