Non-public fairness (PE) buyouts are intricate monetary maneuvers, usually shrouded in complexity. By using tiered acquisition constructions and strategic automobiles, PE traders can unlock worth whereas safeguarding investments. This text explores the nuances of those frameworks, from the position of acquisition automobiles to jurisdictional intricacies and the rise of offshore registrations. It’s the first in a three-part collection.
When PE traders purchase firms in a buyout, they sometimes use newly fashioned acquisition automobiles to take action, fairly than instantly buying the working firms. These automobiles –- additionally known as holding firms, or particular goal automobiles (SPVs) — are created for the aim of the buyout and haven’t traded previous to the transaction closing.
The variety of acquisition automobiles that are created can range and can rely on the complexity of the construction of the buyout and the jurisdictions concerned. Determine 1 reveals what a typical three-tiered acquisition construction could seem like.
Determine 1: Tiered acquisition construction
On this instance, Topco, Midco, and Bidco are automobiles that are created to facilitate the buyout of the working firm. A PE fund, fairly often alongside the goal agency’s administration crew, make investments into the newly created Topco acquisition car. This car lends the cash into the Midco car, which borrows some quantity of debt — sometimes shareholder debt from the PE fund or junior debt from an exterior supplier — and lends this, plus the cash from the Topco car, into the Bidco car. Lastly, the Bidco car borrows some quantity of exterior senior debt and makes use of its whole sum of money to purchase out all debtholders and shareholders of the working firm.[1]
By means of this tiered construction, as a result of the senior lender lends to the Bidco car and to not the Topco car, the senior lender has direct rights towards the entity which owns the working firm, and due to this fact the property of the goal group. This construction ensures that the senior lender’s debt shouldn’t be structurally subordinated to junior debtholders and fairness holders. It provides the senior lender prior declare to the underlying property of the goal firm. Exterior senior debt suppliers in buyouts, similar to banks, will usually favor this structural subordination.
The variety of completely different securities that are issued to finance the transaction and the complexity of the buyout are each necessary components when forming a buyout construction. For instance, in buy-and-build offers, the place PE traders purchase one platform firm after which bolt-on different targets to the platform, these acquisition constructions can grow to be extra advanced.
Variations in jurisdictions additionally play an necessary position in figuring out the transaction construction. For instance, within the US Chapter 11 chapter legal guidelines supply robust safety for junior lenders, so inter-creditor agreements and contractual provisions could suffice. The robust protections additionally imply there’s much less want for the creation of tiered acquisition automobiles as there could also be in the UK or European jurisdictions.
Certainly, there could solely be two automobiles in a US buyout construction: one for fairness holders and one other for all debtholders. All debt devices used to finance the transaction could also be loaned right into a single entity, the place there are contractual provisions and inter-creditor preparations that obtain the required structural subordination, in the identical manner that UK and European buyouts do via the layering of various acquisition automobiles. Nonetheless, extra advanced US buyouts and multi-jurisdictional transactions could contain extra elaborate constructions.
It’s also price understanding the registration of acquisition automobiles in offshore jurisdictions – a well-liked apply in the UK in recent times, pushed largely to keep away from withholding tax.[2] Many PE traders buying UK firms – whether or not they’re based mostly in the UK, the USA, or elsewhere — have created acquisition automobiles registered in offshore jurisdictions. Fashionable offshore jurisdictions embrace the Channel Islands, Luxembourg, and the Cayman Islands. Except for tax-related causes, registering these entities offshore might also present PE acquirers with larger flexibility in receiving dividends from their portfolio firms. For instance, distributions beneath Jersey or Guernsey legislation (within the Channel Islands) will be made with out requiring distributable income to be obtainable.
In a latest analysis paper, I doc a substantial rise in the usage of offshore automobiles in buyout transactions in the UK. In 2000, solely 5% of buyouts concerned an offshore final holding entity, in comparison with greater than 25% of offers in 2022 (see Determine 2). It seems to be significantly widespread in bigger buyout transactions and in buyouts involving PE companies who’re headquartered abroad. On condition that when the final word holding entity is registered offshore its monetary accounts should not publicly accessible (in contrast to when the entity is registered in the UK), this highlights an necessary decline within the transparency of PE buyouts in the UK during the last twenty years.
Determine 2.
Key Takeaways:
Acquisition Autos as Important Instruments: Non-public fairness buyouts generally depend on tiered acquisition constructions, with automobiles like Topco, Midco, and Bidco enjoying important roles in managing investments and money owed.
Structural Subordination Advantages: The layered construction ensures that senior debt suppliers retain precedence over junior lenders and fairness holders, safeguarding their claims towards the working firm’s property.
Jurisdictional Variations Matter: Variations in legal guidelines, similar to Chapter 11 chapter protections in the USA, affect the complexity of acquisition constructions. Stronger chapter legal guidelines could cut back the necessity for a number of automobiles.
Offshore Flexibility: Registering acquisition automobiles in offshore jurisdictions just like the Channel Islands or Luxembourg provides tax benefits and operational flexibility, significantly for dividend distributions. This has grow to be an more and more in style apply in the UK in recent times.
Complexity Grows with Technique: Purchase-and-build offers and multi-jurisdictional transactions add layers of complexity, making structuring essential for efficient administration and danger mitigation.
By understanding these parts, stakeholders can navigate the intricate world of personal fairness buyouts with confidence and precision.
In my subsequent submit, I’ll cowl the consolidation of PE firm portfolio accounts.
[1] These acquisition automobiles will be referred to as something. Topco, Midco, and Bidco have historically been widespread in the UK and are used right here for illustrative functions.
[2] This doesn’t apply to home US transactions.
