Mais conteúdo relacionado
Ferdinand petra - introduction to LBO and Private Equity
- 1. 1Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
Financial Training
Extract on LBO
www.ferdinand-petra.com
Prof: Ferdinand Petra (contact@ferdinand-petra.com)
Any reproduction, copy of this document is strictly forbidden without prior consent of the author
- 3. 3Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
What Is a LBO?
A financing technique for acquiring a Target company
− Primarily funded with debt
− Proportionally small amount of equity
Investors in LBO are called “Financial Sponsors” (important players in the M&A market)
Their goal is to purchase assets, which they plan to sell in the short/medium term for a substantial profit
− Their time frame is typically 3 / 5 years
− Trade buyers, on the other hand, have a much longer time horizon
Focus on cash flows generated by the Target company during the investment period
− Used to pay down debt
− Provides the financial buyers with leveraged returns
The credit crunch (post subprime) has reduced significantly the amount of debt available and therefore
transaction values (and leverage)
− Since last year, we began to witness leverages coming back to pre-crisis levels!
Sponsors evaluate investments with two metrics
− Internal Rate of Return which measures return on equity invested (Excel IRR() or XIRR() functions)
− Cash on Cash multiples (aka Money multiple)
Introduction
- 4. 4Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
Structuring
NewCo
100%
Mezzanine
Funds
Cash
Management
Investment
Fund
Corporate
Banks
Mezzanine
Funds
NewCo
Selling
shareholders
Target
Capital
Cash
“Debt push-down”
Introduction
- 5. 5Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
Financial Sponsors
Investment or financial sponsors are professional financial investors (for instance insurance
companies or pension funds) who bring the rarest and most expensive resource, since it is the
most risky: equity…
… whose objective is to create value by:
− Using the leverage effect
− Improving the profitability and accelerating organic growth
− Increasing external growth (build-up)
− Developing profit-sharing schemes for managers (MBO)
Value creation:
− Materializes at the exit
− Is computed thanks to the IRR, generally in the region of 15 to 25%
Financial sponsors became key players on the market and they now account for an estimated
20% of the European M&A market
Introduction
- 6. 6Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
PE basics
LP
Reporting
Governance
Fund
Money
COC
IRR
Team control
Management
fees ( 2%)
Management
contract
GP
Carried interest
(20%)
Hurdle (8%)
Fees of GPs are increasingly under pressure from reluctant LPs
Introduction
- 7. 7Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
Value Creation And Transfer In LBOs
- 8. 8Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
How Can a LBO Create Value (For Shareholders)?
Deleveraging
− Using available free cash flow to repay debt
Enhancing Top line growth
− Market expansion
− Market share gains
− Consolidation: bolt-on acquisitions
Operational improvements
− Margin improvements and higher efficiency
Fiscal advantages
− Tax payments to the government are reduced by the tax shield on interest
Multiple expansion?
− Can be a result of operating improvements or business turnaround
− Typically assume entry and exit at same multiple (iso-multiple)
Some historical statistics (Jin and Wang 2002) – For all LBO’s from 1996 to 2000, value created came from
43% operating improvement (incl. top line), 24% Leverage and 22% multiple expansion (industry-wide
expansion), 11% multiple arbitrage (higher multiple at exit due to better business)
Value Creation And Transfer In LBOs
- 9. 9Ferdinand Petra – www.Ferdinand-petra.com – All rights reserved 2018 ©
How Can a LBO Create Value? – Corporate Finance Vision
Change in market valuation
Private information (MBO)
Superior market information
Superior deal making
Sale of noncore or underperforming assets
Financial Arbitrage
Cutting costs
Reducing WCR
Removing inefficient managers
Increasing
Operational
Effectiveness
Financial
engineering
Optimizing capital structure
Reducing corporate tax
Optimization of corporate scope
No conglomerate cross-subsidy
Increasing
Strategic
Distinctiveness
Debt discipline
Improving incentive alignment (strategic value accountability)
Monitoring and controlling
Reducing
Agency Costs
Restoring entrepreneurial spirit
Advising and enabling
Mentoring
Source: Berg and Gottschalg, Jensen
Value Creation And Transfer In LBOs