AI PE Buyouts Flashcards
VC
when you invest into a start-up and have a minority stake
Buyout (LBO) Leveraged Buyout
- full control
- target established companies
- debt financing
Operational engineering
how you help the target company
governance engineering
align interest btw. managers and investors into the company
financial engineering
how to raise debt for the LBO
How do you do a buyout?
You make a shell company and you put in debt and equity
then you take the shell company and you merge it with the target company
- the assets of the target company are used as collateral because the debt of the shell company are loaded on the Balance Sheet of the target company. (The target company basically pays the debt and loads it on).
How much debt in comparison to equity is used?
About 50% but earlier more than 50% debt
Why use so much debt?
- tax shield
- high returns because you put a little equity inside and that grows
(e. g. invest 100E and get 200-100 when selling–>100
vs. invest 50 equity and get 200-50E when selling–> 150; you increase your multiple on investment) - when the company is financed with a lot of debt the manager of that company has to work like crazy because the banks are after the debt. The manager (of the target company) has to repay the debt. –> disciplining power (putting pressure on managers to work hard)
second buyout wave 2006-20017
because debt was very cheap back then
when was the first wave?
first wave 1980s
How many M&As are global buyouts?
about 10-15%
The carrot
- management will invest a significant part of their personal wealth in the transaction
the stick
- debt is loaded on the company. To control the managers
What companies undergo buyouts?
Companies that can load on a lot of debt
- companies that can have more profits when it is made more efficient
MBO
management buyout.
Management of a company want to buy out the existing owners and look for the help of PE firm to help them do that.
Secondary buyout
do the same again as in the first buyout
Public-to-private buyouts
when you take a public company private
- when the company is undervalued
- limited visibility (nobody knows that the company is on the stock exchange so nobody buys)
- high regulatory costs
debt a
most senior claim you can claim a lot of the company
mezzanie debt
very risky debt
PIK loans
loan of 100 and pay 5% interest. But you don’t pay yearly but the interest accumulates. At the end of the loan you pay back the principle and the accumulated interest.
As a PE manager how do you do debt financing?
- ideally you want to use as much debt financing as market conditions allow you to.
1. go to the banks and ask for term loans. (cheap debt) (most money comes from here term loan A, B and C )
2. high yield loans.
3. further down the senior debt levels. (more expensive debt, high interest has to be paid)
-> but don’t overburden company with debt
What happens now
debt is really cheap and EBITDA entry multiples are at a record. Competition is heating up and when you overpay you get worse returns. Money is chasing the deals.
What happens now
debt is really cheap and EBITDA entry multiples are at a record. Competition is heating up and when you overpay you get worse returns. Money is chasing the deals.
Why does the board size decline after a buyout?
- because a small board is more efficient (more agile and faster, outsiders are not needed on the board anymore because the PE now is major shareholder)
