The document discusses leveraged buyouts (LBOs) and provides details on:
- How LBOs work by using borrowed money (leverage) to purchase companies, concentrating control in the hands of private equity firms.
- The ideal characteristics for LBO targets include strong cash flows, limited capital needs, and growth potential.
- Common LBO strategies like finding undervalued assets, restructuring, and creating value through improved incentives.
- Components of LBO capital structures, which use secured and unsecured debt.
- Potential exit strategies for private equity firms like selling the company, recapitalization, or initial public offerings.
- Risks of LBOs related to interest rates, overpay
Agenda for Keating Capital Q1 Presentation:
Keating Capital Investment Thesis, Strategy and Focus
Investing and Selling Discipline
Stock Market Volatility
U.S. IPO Market
Distributions to Stockholders
Portfolio Company Review
Performance Scorecard
Keating Capital in Perspective
Agenda for Keating Capital Q1 Presentation:
Keating Capital Investment Thesis, Strategy and Focus
Investing and Selling Discipline
Stock Market Volatility
U.S. IPO Market
Distributions to Stockholders
Portfolio Company Review
Performance Scorecard
Keating Capital in Perspective
"How to maximize your potential to attract US capital" by John Bautista TheFamily
By John Bautista, Partner at Orrick.
Join us IRL next time! http://meetup.com/thefamilyspecialevents
The contents of this video are intended for general information purposes only and should not be considered or construed as legal advice. The distribution of this presentation or its content is not intended to create, and receipt of it does not constitute, an attorney-client relationship. (The views set forth herein are the personal views of the presenters and do not necessarily reflect those of Orrick, Herrington & Sutcliffe.)
Current Trends in Leveraged Finance (Series: Leveraged Finance)Financial Poise
This webinar discusses some of the latest trends and developments in leveraged finance terms and practices and the extent to which some of these have gained market acceptance.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/current-trends-in-leveraged-finance-2021/
How to Raise Seed Funding for Your Startup: Convertible Notes and SAFEsideatoipo
Seed financings enable a startup to put together its initial team, build a working prototype, and begin to test the market. Often these investments are made via convertible debt or SAFEs. Veteran Silicon Valley startup and corporate attorney Jason Putnam Gordon will cover the following topics:
1. Required corporate structure
2. Legal considerations when pitching investors for seed financing
3. Differences between using convertible debt and SAFEs
4. Key terms and considerations when raising seed funding
5. Common mistakes and pitfalls that companies make when raising seed funding via convertible debt and SAFEs
6. How to close your seed financing
7. Important post-closing tasks
8. And much, much more
A crash course in angel and venture capital funding at SVOD Summer 2013AmBAR
Theresia Gouw, Accel Partners, and Iiya Strebulaev, Stanford, offered a crash course in angel and venture capital funding at SVOD Summer 2013. The pair explained the science behind the practice, and what it takes to succeed in the crowded startup community.
Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...UCICove
An introductory crash course on the typical legal and business terms involved with, and negotiated in, venture capital fundraising including SAFE, Convertible Note, Series Seed and Series A financings.
Value-oriented investment firm that commits people, capital, and fortitude to help address the critical issues facing public companies. Includes company, market and strategy overview.
Note: Confidential and proprietary information omitted from public version.
The deal is complete, and the parties have finished the hard work. Or have they? Integration planning turns to execution as people, process, and technology are combined once the deal is legally closed. The buyer will need to consider the purchased business or assets from the standpoint of employees, IT, customers, suppliers, and a multitude of other areas. In addition, numerous post-closing legal issues may arise, including purchase price adjustments, breaches of representations and warranties, enforcement of key negative employment-related covenants and restrictive covenants, collection of pre-closing accounts receivable, and true-ups of final financials. This episode guides listeners through the process, timing, and issues which most commonly arise after the closing of deals.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/post-closing-issues-integration-potential-buyer-seller-disputes-2021/
Crowdfinance -101 (Series: Crypto, Crowdfunding & Other Crazy Concepts)Financial Poise
What is the “crowd” in Crowdfinance? What does the crowd thus buy and by what means and modes? And why should the crowd do this rather than put its money to work otherwise? What are the old (and continuing) modes for marketing and selling private securities? What is it like to purchase private securities from on-line portals? How are risks of fraud and mistake allocated there? Do on-line portals help get the rest of us in on unicorns in utero? How are equity securities purchased by the crowd turned into money? Is there a secondary market for private securities? Should ICOs be understood as crowdfinance by other means?
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/crowdfinance-101-2021/
this is our presentation on the starting stages to for planning to prepare to go for startup funding / small business loans / invoice loans / factoring etc etc
"How to maximize your potential to attract US capital" by John Bautista TheFamily
By John Bautista, Partner at Orrick.
Join us IRL next time! http://meetup.com/thefamilyspecialevents
The contents of this video are intended for general information purposes only and should not be considered or construed as legal advice. The distribution of this presentation or its content is not intended to create, and receipt of it does not constitute, an attorney-client relationship. (The views set forth herein are the personal views of the presenters and do not necessarily reflect those of Orrick, Herrington & Sutcliffe.)
Current Trends in Leveraged Finance (Series: Leveraged Finance)Financial Poise
This webinar discusses some of the latest trends and developments in leveraged finance terms and practices and the extent to which some of these have gained market acceptance.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/current-trends-in-leveraged-finance-2021/
How to Raise Seed Funding for Your Startup: Convertible Notes and SAFEsideatoipo
Seed financings enable a startup to put together its initial team, build a working prototype, and begin to test the market. Often these investments are made via convertible debt or SAFEs. Veteran Silicon Valley startup and corporate attorney Jason Putnam Gordon will cover the following topics:
1. Required corporate structure
2. Legal considerations when pitching investors for seed financing
3. Differences between using convertible debt and SAFEs
4. Key terms and considerations when raising seed funding
5. Common mistakes and pitfalls that companies make when raising seed funding via convertible debt and SAFEs
6. How to close your seed financing
7. Important post-closing tasks
8. And much, much more
A crash course in angel and venture capital funding at SVOD Summer 2013AmBAR
Theresia Gouw, Accel Partners, and Iiya Strebulaev, Stanford, offered a crash course in angel and venture capital funding at SVOD Summer 2013. The pair explained the science behind the practice, and what it takes to succeed in the crowded startup community.
Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...UCICove
An introductory crash course on the typical legal and business terms involved with, and negotiated in, venture capital fundraising including SAFE, Convertible Note, Series Seed and Series A financings.
Value-oriented investment firm that commits people, capital, and fortitude to help address the critical issues facing public companies. Includes company, market and strategy overview.
Note: Confidential and proprietary information omitted from public version.
The deal is complete, and the parties have finished the hard work. Or have they? Integration planning turns to execution as people, process, and technology are combined once the deal is legally closed. The buyer will need to consider the purchased business or assets from the standpoint of employees, IT, customers, suppliers, and a multitude of other areas. In addition, numerous post-closing legal issues may arise, including purchase price adjustments, breaches of representations and warranties, enforcement of key negative employment-related covenants and restrictive covenants, collection of pre-closing accounts receivable, and true-ups of final financials. This episode guides listeners through the process, timing, and issues which most commonly arise after the closing of deals.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/post-closing-issues-integration-potential-buyer-seller-disputes-2021/
Crowdfinance -101 (Series: Crypto, Crowdfunding & Other Crazy Concepts)Financial Poise
What is the “crowd” in Crowdfinance? What does the crowd thus buy and by what means and modes? And why should the crowd do this rather than put its money to work otherwise? What are the old (and continuing) modes for marketing and selling private securities? What is it like to purchase private securities from on-line portals? How are risks of fraud and mistake allocated there? Do on-line portals help get the rest of us in on unicorns in utero? How are equity securities purchased by the crowd turned into money? Is there a secondary market for private securities? Should ICOs be understood as crowdfinance by other means?
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/crowdfinance-101-2021/
this is our presentation on the starting stages to for planning to prepare to go for startup funding / small business loans / invoice loans / factoring etc etc
ddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And fortunes are made when real estate crashes by those who have the dry powder to swoop in and buy when others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities involving distressed companies; and tips and best practices for participating in bankruptcy, Article 9, and other sales of distressed businesses (including the concept of serving as the “stalking horse).
Part of the webinar series: RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2021
See more at https://www.financialpoise.com/webinars/
Eddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And fortunes are made when real estate crashes by those who have the dry powder to swoop in and buy when others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities involving distressed companies; and tips and best practices for participating in bankruptcy, Article 9, and other sales of distressed businesses (including the concept of serving as the “stalking horse).
Part of the webinar series: RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2022
See more at https://www.financialpoise.com/webinars/
How to Position Your Startup for Venture Capital Fundingideatoipo
Veteran Silicon Valley venture capital attorney Jason Putnam Gordon disusses the basics of the venture model and path along with the necessary steps to take so that your company’s legal structure is an attractive investment. The discussion includes:
1. Why a Delaware C-Corp is the most-common structure
2. How to document the relationship of the founders and early employees
3. The typical funding stages of a successful startup
4. An overview of convertible debt and SAFEs
5. Why it’s critical to run pro forma cap tables before financings
6. What happens in a venture financing
7. Why compliance with securities laws is important
8. Common legal mistakes in raising capital
9. And much, much more
About the Speaker:
Jason Putnam Gordon is a results-oriented corporate attorney in the Emerging Growth and Venture Capital practice of the San Francisco office of K&L Gates. Jason has a passion for working with experienced entrepreneurs and executives to make their vision a reality.
In his practice, he regularly represents companies throughout their life cycle in matters related to venture capital financing, strategic corporate relationships, corporate formation, complex mergers and acquisitions, sales, and divestitures. Jason also works with angels and venture capitalists as they deploy capital. With industry focuses in health and technology, because of his broad skill set and deep network, Jason regularly works in a wide array of verticals including life sciences, digital health, artificial intelligence, virtual reality, software, hardware, the internet of things, and agricultural technology.
Jason works with companies based locally, elsewhere in the U.S. and internationally. Jason brings a unique skill set to the negotiating table and to litigation-minimization strategies in the boardroom. He started his career as a federal law clerk in the United States District Court for the Eastern District of Pennsylvania and then continued as a litigator handling corporate, securities, intellectual property, and commercial litigation before establishing a transactional practice.
How to Position Your Startup for Venture Capital Fundingideatoipo
During this webinar you will learn the basics of the venture model and path along with the necessary steps to take so that your company’s legal structure is an attractive investment. The discussion will cover:
1. Why a Delaware C-Corp is the most-common structure
2. How to document the relationship of the founders and early employees
3. The typical funding stages of a successful startup
4. An overview of convertible debt and SAFEs
5. Why it’s critical to run pro forma cap tables before financings
6. What happens in a venture financing
7. Why compliance with securities laws is important
8. Common legal mistakes in raising capital
9. And much, much more
Eddie Lampert bought Kmart out of bankruptcy. W.L. Ross made a fortune many times over buying steel and other companies out of bankruptcy. Hedge funds and other distressed debt traders buy and sell millions of dollars of distressed securities and bankruptcy claims every day. A number of private equity funds focus exclusively on buying distressed businesses, fixing, and selling them. And fortunes are made when real estate crashes by those who have the dry powder to swoop in and buy when others are forced to sell. This webinar explains how to loan to, or purchase the debt of, a company in order to acquire it (a strategy commonly called “loan to own”); how to learn about opportunities involving distressed companies; and tips and best practices for participating in bankruptcy, Article 9, and other sales of distressed businesses (including the concept of serving as the “stalking horse).
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/opportunity-amidst-crisis-buying-distressed-assets-claims-and-securities-for-fun-profit-2020/
Raising Capital: Negotiating with Potential InvestorsFinancial Poise
Every business needs capital (cash) to fund its activities. But not all capital is created equal. At the most macro level, a business can raise cash by selling equity or by borrowing (and these alternatives are not by any means mutually exclusive).
This webinar explains the different types of capital available to fund a startup; how to identify potential funding sources; how to evaluate competing funding proposals; and how (and when) to negotiate financing terms. In addition, this webinar will address the kinds of investors for entrepreneurs to consider for their start-ups.
Part of the webinar series: The Start-Up/Small Business Advisor 2022
See more at https://www.financialpoise.com/webinars/
Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/S...Financial Poise
Every business needs capital (cash) to fund its activities. But not all capital is created equal. At the most macro level, a business can raise cash by selling equity or by borrowing (and these alternatives are not by any means mutually exclusive).
This webinar explains the different types of capital available to fund a startup; how to identify potential funding sources; how to evaluate competing funding proposals; and how (and when) to negotiate financing terms. In addition, this webinar will address the kinds of investors for entrepreneurs to consider for their start-ups.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/raising-capital-negotiating-with-potential-investors-2021/
Banking Industry: Structure and Competition
Chapter 13 of Mishkin's The Economics of Money, Banking, and Financial Markets
Outline:
- Historical Development of the Banking System (American Banking System)
- Financial Innovation and the Growth of the Shadow Banking System
- Structure off the US Commercial Banking Industry
- Bank Consolidation and Nationwide Banking
- Separation of the Banking and other Financial Service Industries (Glass-Steagall Act)
- Thrift Industry: Regulation and Structure
- International Banking
The anscersX multibureau business trade credit report includes the best elements from business credit reports from Dun and Bradstreet, Equifax and Experian, allowing customers to get the information they need to make a credit decision about their customers.
Cross Cultural Communications, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Manage Your Customer's Payment With Speed, Accuracy, Reliability and Savings, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Securing Your Transactions in Latin America and Mexico, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Financial Statement Analysis - Reading the Numbers Correctly, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Efficiency Models and Methods to Improve Credit Department Performance, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Dialing for Dollars, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Analyzing Liquidity Using the Cash Conversion Cycle, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Saying Yes to the Sale With Limited Information, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Investigating Your Debtor, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Coloring Your Collections, 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Collections Best Practices seminar. 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Antitrust seminar at 2014 CreditScape, Western Region Credit Conference Seminar Slide Deck, sponsored by Credit Management Association. More information: www.creditmanagementassociation.org
Training session for the Reliance Credit Network service on anscers.com. Originally presented by Mike Mitchell, President of CMA, at the Reliance Credit Meeting on September 11, 2014.
1. LEVERAGED BUYOUTS (LBOS)-
FROM BOOM TO BUST
PRESENTATION TITLE GOES HERE
David D. Tawil
(212) 300-6791
david.tawil@etg-capital.com
V E N D O R P R O TE C TI O N W H E N I T C O U N TS
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
2. Professional Background
• 6 years NY bankruptcy attorney
• Skadden, Slate, Meagher & Flom and Davis Polk & Wardwell
• Representation of debtors, lenders, vendors, bondholders in bankruptcy,
insolvency, restructuring
• 5 years at Credit Suisse leveraged-finance
• Created and managed receivables protection (put option) business.
• Since 2009, manage put option and non-cancelable, single-debtor
insurance business, with a focus on protecting high-risk accounts
receivable.
• Deep experience in automotive, building, chemicals, retail, consumer
products, print/paper, plastics/packaging, metals, energy
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
2
3. NOT a credit manager,
BUT a fixed-income portfolio
manager; AN INVESTOR
• The proper way to look at receivables…..like a fixed-
income investor (“$1 of product shipped is $1 loaned”)
• Difference: relationship to the borrower
• Always be thinking: “What is a reasonable “return” on
our investment”
• Constantly changing risk profiles
• While considering long-term relationship with customer
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
3
4. Risk/Reward Balance
• Achieving the appropriate risk/reward balance
• Looking to the market for guidance- unsecured debt,
comparables, etc.
• Example: Feb. „09; Ford
– Automotive-parts suppliers to Ford earning 2.5% net-profit per shipment
(60 day terms; effective yield of 15%).
– Ford debt yielding 20+%.
– Better investment to send all employees home and invest in Ford bonds!
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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5. High Risk- what to look for
• Don‟t wait until days-payable starts to trend upward.
• Said another way, everyone pays- until they don‟t
• Important Data Points
• Leverage
• Cash-Flow
• Liquidity
• Large important events (debt maturity, lawsuit, one-time capital
expenditures)
• Drastic CapEx cut-back
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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6. Leveraged Buyouts-
The Bottom-Line
1) Buy Low and Exit High
2) Use someone else’s money to:
(i) multiply the return or
(ii) to cushion the loss
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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7. Leveraged Buy-Outs
A Simple Example- Buy a House
- Buy a house / company for $100
- Minimal down payment ($20)
- Significant leverage /debt ($80)
- Cash flow (your wages / company earnings) must meet debt payments
- Over three years, mortgage / debt payments reduce principal to $75
- Over three years, value of the house / company rises to $125
- Sell company for $125
- Subtract $75 of debt
- $50 profit on $20 investment in three years
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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8. Private Equity
What is Private Equity?
- An alternative investment strategy that involves investing in privately held companies.
- The key feature is the private nature of the securities purchased. Investment is illiquid.
- Investors invest for the long-haul; investment horizons may be as long as 5 to 10 years.
Partnership Structure
- Limited partnership consist of limited partners (LP) and general partners (GP).
- LPs are the investors, i.e., the main providers of capital. These are typically wealthy individuals,
endowments, pension funds, and other institutional investors.
• Investors are typically looking for long-term capital growth, with zero or low annual dividends
- GP is responsible for the day to day management of the partnership‟s investments.
- Closed-ended fund
Compensation
- GPs are compensated through a fixed management fee, as a percentage of committed capital, and
profit sharing of investment gains known as carried interest, or simply, carry.
- While the fee and carry vary across partnerships, the 2-and-20 is a standard that many funds gravitate
towards.
- 2-and-20 means that the annual management fee is 2% of the committed capital, and when final
investment gains are realized, 20% of the profits go to the GP as their profit share.
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
8
9. Types of Private Equity Players
Volume- lots of bets (Sun Capital) vs. few bets (KKR)
Healthy (Carlyle) vs. Distressed (Cerberus)
Management- existing (Berkshire Hathaway) vs. self-installed (Apollo)
Asset-Focus- operations vs. real-estate
Turnaround vs. Growth
Owners of other parts of capital structure?
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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10. Leveraged Buy-Outs
The Basics and Advantages
- LBOs are a way to take a public company private or transfer the ownership of a private company (from
one private equity firm to another).
- LBOs are financed with large amounts of borrowing (leverage), hence the name.
- LBOs use the assets or cash flows of the company to secure debt financing (bonds or bank loans) to
purchase the outstanding equity of the company.
- After the buyout, control of the company is concentrated in the hands of the LBO firm and management,
and there is no public stock outstanding.
- Acquiror looks to realize its investment in 3 to 5 years (longer now)
- Target returns are approximately 25%
Advantages of LBOs
- Ability to operate outside the public eye or out from under larger parent
- Alignment of management and owner interests
- Liquidity for founders/management without ceding operational or day-to-day influence
- Tax advantages associated with debt financing
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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11. Leveraged Buy-Outs
Ideal Characteristics of the Target
Ideal Financial Characteristics
- Strong, predictable cash flows to service the financing costs related to the acquisition
- Limited working capital and future capital requirements
- Readily separable assets or businesses that could be made available for sale, if necessary
Ideal Business Characteristics
- Strong management team
- Competitive advantage through well-known brand names, strong market share or as a low-cost
producer
- Real growth potential
- Not subject to prolonged cyclical swings in profitability (a problem with commodities, maybe; long
cycles help mitigate the risk)
- Products that are not subject to rapid technological change
- Viable exit strategy
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
11
12. Leveraged Buy-Outs
Strategies
1) Finding cheap assets – buying low and selling high (value arbitrage or multiple expansion)
2) Unlocking value through restructuring:
- Financial restructuring of balance sheet – improved combination of debt and equity
- Operational restructuring – improving operations to increase cash flows
3) Value Creation
- Management incentives and agency cost effects
- Increased ownership stake may provide increased incentives for improved performance
- Better aligns manager /shareholder interests
- Debt puts pressure on managers to improve firm performance to avoid
bankruptcy
- More efficient decision process as private firm
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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13. Leveraged Buy-Outs
Capital Structure
- Although there is no set capital structure for an LBO, it must be designed to meet the requirements of
the specific situation within the constraints of the financial markets.
- Consideration is given to the company‟s existing and forecasted cash flow, its capital expenditure
requirements, its working capital needs and the investment strategy.
- The most important objective of any capital structure is to provide a financial foundation that gives the
company the ability to implement its business strategy and permits flexibility in reacting to adverse
circumstances
Secured debt (a.k.a. bank debt, which includes bridge loans, revolving lines of credit, term loans)
The target company offers collateral for every dollar of the loan.
• It is generally the most senior debt in any firm‟s capital structure.
Unsecured debt (“junk bonds”, high-yield debt”, “subordinated debentures”, “sub debt”)
• If an acquiror needs to borrow an amount that exceeds the value of their tangible assets, it raises unsecured debt.
The lender makes the loan even though the target has no collateral to pledge.
• The lender demands a higher interest rate for the added risk.
Other
Discount debentures/Zero-coupon (“zeros”)- accrete for a few years, before requiring the borrower to pay interest. In other
words, if the target company borrows $100 MM of zeros at 10%, it doesn‟t pay any interest the first year, but it owes
$110 MM at the end of the year.
PIKs- Payment-in-Kind notes- non-cash interest payments
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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14. Leveraged Buy-Outs
Exit Strategies
1) Sale of Company
Liquidity: High
Considerations
Existence of strategic buyers
Financial buyer valuations are lower
Limited buyer universe for large companies
2) Recapitalization
Liquidity: Moderate
Considerations
Constraints of existing debt
Continued ownership
3) Public Offering
Liquidity: Moderate
Considerations
Dependent on equity market (Valuation, Degree of liquidity)
Low receptivity to cashouts
Not available for all types of businesses
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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15. Leveraged Buy-Outs
Risks
- Rising interest rates
- Higher asset valuation - overpayment
- More regulation of industry
- Economic slowdown
- Failure of exit strategy
– - Boom to bust…are the markets (equity and/or debt) open for exit
(IPO, Recap, Sale to financial buyer)
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
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16. David D. Tawil
(212) 300-6791
david.tawil@etg-capital.com
V E N D O R P R O TE C TI O N W H E N I T C O U N TS
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM
25 WEST 39TH STREET NEW YORK, NY 10018 212.300.6700 WWW.ETG-CAPITAL.COM