MBO = purchase by management team of a business or the entire issued share capital of a
company (assisted by significant element of debt finance = leveraged buy-out (LBO))
Number of MBOs now much lower than historically and many more private equity-run deals
Private equity investor = private equity fund
Private equity house (PEH) = party that instructs the firm as adviser to the general partner
of the private equity fund
PRIVATE EQUITY FUND (PEF)
PEF = gathers money from a number of different investors and then seeks opportunities for
investing that money to make a return
o Both income and capital growth
o Hold shares and loan notes in a number of different ‘portfolio companies’
Traditionally for making investments in unquoted securities, although now may be involved
in takeovers of listed companies
PEH has a number of funds, each investing, holding and managing those investments and
then exiting, returning capital to investors
Each fund is generally a limited partnership ≥ 1 limited partner + ≥ 1 general partner
o Limited partners = liability limited to amount of capital invested
Limited liability for investors (limited partners), provided they do not take
part in management of limited partnership business
If withdraw part of capital, remain liable for debts of limited partnership up to
amount withdrawn = small proportion capital contribution + remained as loan
to limited partnership
o General partners = Unlimited liability
responsible for running partnership business + fund + decisions
generally a company, whose directors and SHs will be the employees of the
PE firm which established the fund
fund manager will be GP – regulated by FCA
No legal personality – legal title to LP’s assets held by GP, with shares in T (or acquisition
vehicle) often held through a chain of companies under GP
Tax transparency – avoids double taxation for limited partners + allows investors with
special tax status (charities / low tax jurisdictions) to continue to enjoy tax savings
o No tax paid on any income or capital gains made by the fund
o Each investor taxed on its share of income or gains
Less regulation + greater flexibility than company – CA 2006 does not apply
o Partnership Act 1890 + Limited Partnerships Act 1907 do
o generally governed by a Limited Partnership Agreement (as no need for articles)
Fewer filing requirements + greater privacy – very few filing requirements
,3 TYPES OF PRIVATE EQUITY ACTIVITY
1. Venture Capital = funding of a new business with little/no track record
2. Development Capital = funding of existing, mature business to help it develop
3. Buy-Out = funding of purchases of established businesses where there is still a margin for
improvement of performance
BUY-OUT
Management Buy-OUT – existing mgmt. of co. or business buy that co./business (the
target (T)) from its existing owner
Management Buy-IN – new mgmt. team is assembled for the purposes of running T after
its acquisition from its existing owner
BIMBO = hybrid between the two – Existing managers and new managers brought in
Both will set up an acquisition vehicle (AV) into which it invests – this AV then acquires T
Alternatively – fund invests in a new co. and sets up a second co. as a WOS – the second
co. becomes the AV and acquires T
o Depends on tax advice
Following acquisition, mgmt. team devote their time to make the bought-out business
succeed
o may be compensated with a salary and bonuses for their efforts
o and/or – allowed to subscribe for equity (shares) in Newco 1
so they can receive a proportionate part of capital gain in value of the bought-
out business
Virtually all MBOs use a certain amount of ‘leverage’ or debt finance using T’s assets as
security
o Aka ‘leveraged buy out’
MBO/MBIs Commonly arise from:
o Divestment of non-core activities/subsidiaries of a co./group of companies
particularly common after a takeover of a publicly quoted holding company
o The administration of a company which still has a viable subsidiary or division
which can be easily sold.
o Management initiative: on occasions, the managers of T may feel that it could
perform better provided it obtained the correct support and backing.
That support and funding may not be forthcoming from its existing owner and
therefore mgmt. may wish to purchase T from its existing owner.
o The current owner of a business or co. may die or wish to retire with no obvious
successor.
, MBO/MBI STRUCTURE
BEFORE COMPLETION
Lawyers acting for mgmt. team arrange for the transfer of 2 x shelf companies into the
ownership of the mgmt.
o Newco 1 = investment vehicle (IV)
o Newco 2 = acquisition vehicle (AV)
Subscriber shares in Newco 1 transferred to mgmt. team and subscriber shares in Newco 2
transferred into Newco 1 (Newco 2 becomes WOS of Newco 1)
AT COMPLETION
Funding of Newco 1 and Newco 2 + the acquisition of shares/assets of T by Newco 2 +
granting of security by Newco 1 and 2 (and T where shares of T have been acquired) to the
bank happen simultaneously
Investment from mgmt. and the Fund go into Newco 1 (IV)
o Money passes to Newco 2 by way of…
Intragroup loan OR
By Newco 1 investing in further shares from Newco 2
Bank lends money to Newco 2 in return for security over the assets of Newco 2, T (if shares
acquired) and Newco 1
o Usually expects borrowing to be guaranteed by newco 1 and T (where shares
acquired)
Once monies in place, acquisition of T by Newco 2 can complete
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