Chapter 4- LBO Flashcards
What is an LBO?
The acquisition of an asset, company, or division financed through using a high amount of debt; the remainder of the financing is via a sponsor.
What is the typical investment horizon of an LBO?
Within 5 years.
What are the keys factors when securing debt for the LBO?
Most often bank debt (which is most preferred, as it is the cheapest) is reliant upon an asset base.
However in robust debt markets, projected cash flow amounts may suffice.
What are the typical financial sponsors of an LBO?
PE firms, hedge funds, merchant banking divisions of investment banks, SPACS, VCs.
How do sponsors typically organize their capital?
Most often it is organized in a limited partnership where the GP manages and the LP(s) are passive.
What are the role of investment banks in an LBO?
To provide financing and act as strategic M&A advisors.
What is the role of an investment bank on the buy-side?
Typically on the buy-side bankers may develop and market the optimal structure, advise sponsors, and source deals.
What are the roles on the sell side?
Typically they act as advisors, market deals through organized sale process and sometimes provide stapled financing:
What are the two ways EV growth is achieved?
1.) EBITDA Growth- organic growth, acquisitions, or streamlining operations.
2.) EBITDA Multiple Expansion
How much of LBO financing is typically equity?
30%-40%
What is a “bridge” or bridge loan?
Interim financing that is provided to “bridge” the issuance of permanent financing in the case that it cannot be fully secured by end of LBO.
Why do investment banks often syndicate bridges?
Due to the high exposure to the borrower that arises when bridge financing is extended.
What is mezzanine debt?
The debt that is between traditional debt and equity.
