Non-public fairness (PE) buyouts are intricate monetary maneuvers, typically shrouded in complexity. By using tiered acquisition buildings and strategic autos, PE buyers can unlock worth whereas safeguarding investments. This text explores the nuances of those frameworks, from the function of acquisition autos to jurisdictional intricacies and the rise of offshore registrations. It’s the first in a three-part collection.
When PE buyers purchase firms in a buyout, they sometimes use newly fashioned acquisition autos to take action, slightly than immediately buying the working firms. These autos –- additionally known as holding firms, or particular function autos (SPVs) — are created for the aim of the buyout and haven’t traded previous to the transaction closing.
The variety of acquisition autos that are created can fluctuate and can rely on the complexity of the construction of the buyout and the jurisdictions concerned. Determine 1 exhibits what a typical three-tiered acquisition construction could appear to be.
Determine 1: Tiered acquisition construction
On this instance, Topco, Midco, and Bidco are autos that are created to facilitate the buyout of the working firm. A PE fund, fairly often alongside the goal agency’s administration group, 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 amount of cash 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 belongings of the goal group. This construction ensures that the senior lender’s debt will not be structurally subordinated to junior debtholders and fairness holders. It provides the senior lender prior declare to the underlying belongings of the goal firm. Exterior senior debt suppliers in buyouts, akin to banks, will typically favor this structural subordination.
The variety of totally different securities that are issued to finance the transaction and the complexity of the buyout are each vital elements when forming a buyout construction. For instance, in buy-and-build offers, the place PE buyers purchase one platform firm after which bolt-on different targets to the platform, these acquisition buildings can turn out to be extra advanced.
Variations in jurisdictions additionally play an vital function 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 may be much less want for the creation of tiered acquisition autos as there could also be in the UK or European jurisdictions.
Certainly, there could solely be two autos 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 by means of the layering of various acquisition autos. Nonetheless, extra advanced US buyouts and multi-jurisdictional transactions could contain extra elaborate buildings.
It’s also value understanding the registration of acquisition autos in offshore jurisdictions – a preferred observe in the UK lately, pushed largely to keep away from withholding tax.[2] Many PE buyers buying UK firms – whether or not they’re primarily based in the UK, the US, or elsewhere — have created acquisition autos registered in offshore jurisdictions. Well-liked 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 higher flexibility in receiving dividends from their portfolio firms. For instance, distributions underneath Jersey or Guernsey regulation (within the Channel Islands) will be made with out requiring distributable earnings to be obtainable.
In a current analysis paper, I doc a substantial rise in using offshore autos 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 notably widespread in bigger buyout transactions and in buyouts involving PE corporations who’re headquartered abroad. Provided that when the final word holding entity is registered offshore its monetary accounts are usually not publicly accessible (in contrast to when the entity is registered in the UK), this highlights an vital decline within the transparency of PE buyouts in the UK over the past twenty years.
Determine 2.
Key Takeaways:
Acquisition Autos as Important Instruments: Non-public fairness buyouts generally depend on tiered acquisition buildings, with autos like Topco, Midco, and Bidco taking part in 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 belongings.
Jurisdictional Variations Matter: Variations in legal guidelines, akin to Chapter 11 chapter protections in the US, affect the complexity of acquisition buildings. Stronger chapter legal guidelines could cut back the necessity for a number of autos.
Offshore Flexibility: Registering acquisition autos in offshore jurisdictions just like the Channel Islands or Luxembourg affords tax benefits and operational flexibility, notably for dividend distributions. This has turn out to be an more and more fashionable observe in the UK lately.
Complexity Grows with Technique: Purchase-and-build offers and multi-jurisdictional transactions add layers of complexity, making structuring essential for efficient administration and threat mitigation.
By understanding these components, 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 autos 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.
