Non-public fairness (PE) buyouts are intricate monetary maneuvers, typically shrouded in complexity. By using tiered acquisition buildings 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 sequence.
When PE traders purchase firms in a buyout, they sometimes use newly fashioned acquisition automobiles to take action, fairly than straight buying the working firms. These automobiles –- additionally known as holding firms, or particular objective 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 exhibits what a typical three-tiered acquisition construction might 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 staff, make investments into the newly created Topco acquisition automobile. This automobile lends the cash into the Midco automobile, 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 automobile, into the Bidco automobile. Lastly, the Bidco automobile borrows some quantity of exterior senior debt and makes use of its complete amount of cash to purchase out all debtholders and shareholders of the working firm.[1]
By this tiered construction, as a result of the senior lender lends to the Bidco automobile and to not the Topco automobile, the senior lender has direct rights in opposition to the entity which owns the working firm, and subsequently the property 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 property of the goal firm. Exterior senior debt suppliers in buyouts, similar to banks, will typically 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 elements 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 buildings can turn into extra complicated.
Variations in jurisdictions additionally play an necessary position in figuring out the transaction construction. For instance, within the US Chapter 11 chapter legal guidelines provide sturdy safety for junior lenders, so inter-creditor agreements and contractual provisions might suffice. The sturdy 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 might 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 method that UK and European buyouts do by way of the layering of various acquisition automobiles. However, extra complicated US buyouts and multi-jurisdictional transactions might contain extra elaborate buildings.
It is usually value understanding the registration of acquisition automobiles in offshore jurisdictions – a preferred follow in the UK lately, pushed largely to keep away from withholding tax.[2] Many PE traders buying UK firms – whether or not they’re primarily based in the UK, the US, or elsewhere — have created acquisition automobiles registered in offshore jurisdictions. Well-liked offshore jurisdictions embrace the Channel Islands, Luxembourg, and the Cayman Islands. Other than tax-related causes, registering these entities offshore can also present PE acquirers with higher flexibility in receiving dividends from their portfolio firms. For instance, distributions beneath Jersey or Guernsey legislation (within the Channel Islands) might be made with out requiring distributable earnings to be obtainable.
In a current 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 frequent in bigger buyout transactions and in buyouts involving PE corporations who’re headquartered abroad. Provided that when the last word holding entity is registered offshore its monetary accounts aren’t publicly accessible (not like 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 20 years.
Determine 2.
Key Takeaways:
Acquisition Automobiles as Important Instruments: Non-public fairness buyouts generally depend on tiered acquisition buildings, with automobiles like Topco, Midco, and Bidco enjoying vital 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 in opposition to the working firm’s property.
Jurisdictional Variations Matter: Variations in legal guidelines, similar to Chapter 11 chapter protections in the US, affect the complexity of acquisition buildings. Stronger chapter legal guidelines might 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 turn into an more and more fashionable follow 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 danger 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 automobiles might be known as something. Topco, Midco, and Bidco have historically been frequent in the UK and are used right here for illustrative functions.
[2] This doesn’t apply to home US transactions.
