CH13 :: financing the deal (PE, Hedge funds)

Question 1

LBO

Answer 1

leveraged buyout

small investor group using high precentage debt financing
–> equity investors and management

Question 2

MBO

Answer 2

management buyout
executed by firms managers buy shares of firm they are managing

managers wont have enough money so the loan

Question 3

LBO

Answer 3

management buyout

firms managers buys shares –> niet genoeg kap dus gaan veel lenen

Question 4

MBI

Answer 4

management buyin
= LBO door managers outside –> managers team acquires another firm together with private equity investors

Question 5

asset based/secured lending

Answer 5

loaning money secured by collateral (secured by bv inventory)
ST cash flow demands

Question 6

cash flow based/unsecured lending

Answer 6

unescured loan –> no guarentee to lenders

borrowing from revenues and expecting to recieve cash in future

Question 7

LT financing

Answer 7

junk bonds= very risky high yield bonds, issued by firms relatively low rating –> higher risk of not being paid zo high yield (rente)

et zijn obligaties die worden uitgegeven door bedrijven of entiteiten met lagere creditratings, wat aangeeft dat er een grotere kans is dat de uitgever niet in staat zal zijn om rentebetalingen te doen of het hoofdbedrag terug te betalen op de vervaldatum.

leveraged bank loans

convertible debt

Question 8

bridge financing

Answer 8

ST loan until firm (die geld leent) scures permanent financing or removies existing obligationpq

Question 9

payment in kind

Answer 9

pay back debt at the end -> is more debt, no intermediate interest payments

Question 10

hedge funds

Answer 10

trade liquid assets –> attempt to improve performance

arbitrage= take advantage of misprincingang

Question 11

angel investors

Answer 11

experienced business person that invest in firm in early stages, invest, helps and supports in return for ownership equity

Question 12

seller financing

Answer 12

ge leent van uw bedrijf dat ge overneemt –> niet alles in 1 keer betalen maar in stukken

adv seller: hogere prijs kunnen vragen want buyer koopt in delen dus zijn PV is lager en maakt de deal mogelijk als banking financing is niet mogeljk

adv buyer: have to invest less right now en operational risk to seller if buyer default loan

Question 13

cash on hand

Answer 13

extra cash de target heeft

kunt met dat cash als ge overneemt de outstanding shares overkopen

kunt ook cash krijgen door assets te verkopen –> REDUNDANT ASSETS

Question 14

private equity

Answer 14

focus on buying stocks and having control and ownership of private firms

PTP –> public to private

voordelen:
1) high debt level –> cash flow stable and high to pay debt
2) management forced to invest in target firms shares –> additional incentive to preform well

Question 15

SPAC

Answer 15

special porpose acquisition company
= listed on stock market is an empty shell –> raised for acquisition

dus als ge stocks koopt van empty shell dan gaat da geld naar private equity firm

Question 16

return of PE fund

Answer 16

kijken naar internal rate of return

als we kijken tot 10jaar is return zelfde als de s&p index na 10 jaar zien we wel dat PE veel meer rendement oplevert maar logisch want is ook riskier

Question 17

how can PE exit

Answer 17

1) corporate acquisition= firm sold to industrial investor

2) IPO:

3) second buyout= private equity stake is bought by another private equity investor –>

Question 18

explain asset write up

Answer 18

increase book value of assets, so there is more depreciation so you need to pay less taxes

Question 19

adv of LBO

Answer 19

management incentives

better alignement between owner and manager –> reduces agency conflict

more efficient decion processes

improvement operating preformance

takeover defense by eliminating public investors

Question 20

disadv LBO

Answer 20

high fixed costs of debt raise –> break even point higher

not appropriate for businesses with high business risk

Question 21

VERHAAL LBO

Answer 21

LBO create value by reducing debt, increasing margins –> increasing exit multiples

Initially: high debt to equity ratio ; use FCF to reduce debt
you have high interest payment –> interest tax shield
assets write up ; more depcreciation –> depreciation tax shield

DAARNA:
debt will decrause and assets wil go down after depreciation –> tax shield decrease

FCF eerst heel doog door tax shield, used to pay of debts and reinvested in firms –> firm gets additional cash wich improves OPERATING MARGIN

SLOT: debt reduced over time because of operating improvement the FCF increases and value of firm will increate
can exit by ipo en get high returns