PA SGS 9 Consolidation

SGS 9: Management (of Target) Buy-outs (share + asset sale)

1. MBO/MBI Structure

o Before completion

§ Here there is a ‘2’ NewCo structure:
-NewCo 1 = investment vehicle
-> Management and PE will subscribe to its shares
-> NewCo1 subscribes to shares in NewCo 2
- NewCo 2 = acquisition vehicle
-> this Co actually buys shares in Target by way of cash injected into it by NewCo1
-> Cash injection = inter-co loan from NewCo 1 or
-> NewCo1 can subscribe to further shares in NewCo2
-> Bank also funds purchase price to NewCo 2 (secured loan)




o After completion:


NB: Bank takes security from NewCo1, NewCo2 and Target
This security will usually be a GUARANTEE




2. Features of MBOs

(1) Internal Rate of Return (‘IRR’)

 measure by which ‘PEF’ assesses the return the investors in the fund will make on its investment
 represents the growth rate of the investment (initial investment vs. total return on investment on exit)
 consists income receipts (dividends and interest) and capital receipts (gain on exit)
NB: income receipts alone will never be enough for the fund -> right from the start = inbuilt driver to achieve an exit

(2) What is an ‘exit’?

 Means by which a PE fund achieves a return on the investment (ca.3-7 years)
 Capital returns (by way of exit) either by:
 Floatation: Target is floated on stock exchange or
 Sale: sold to 3rd party purchases or
 Secondary buy-out: sold to a secondary buyer
 Liquidations – if the venture goes wrong
 Management Team buys out the shares
o NB: sellers benefit from ‘flow-through structure’