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’
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’
