Advanced Structuring of LBOs & Private Equity Transactions

Day One

Private Equity & How They Create Value

• The three key stages of Private Equity value creation: The Acquisition

• Operations - extracting and boosting value during ownership

• Exit - how to exit successfully

The traditional PE value creation model – the 3 key value drivers

Techniques for enhancing value:

• Capital structure’s impact on the value

• Liquidity events pre-exit - Using soft exit recaps/refinancing to extract value

• How equity bridges are used to enhance the value

• Leveraging the fund can boost value and returns

• Avoiding value traps

Structuring a Leveraged Transaction: The Key Issues in LBOs

• Taking security/collateral generally and the key principles

• Ranking and priority of senior vs junior debt: Contractual vs Structural subordination

• Other methods of creating subordination

Tax issues:

• Group tax relief

• Thin cap rules

• Transfer pricing

Structure, Key Terms and Trends for Private Equity Funds

• Review of typical (Luxco) fund structure

• Key terms & conditions

• Investment period (how long)

• Preferred return (rate, calculation)

• Carry (European vs US approach)

• How Private Equity Fund structures optimise value creation

• Hot topics for LPs & GPs

• Case Study: Identifying problematic items in reconciling equity value to enterprise value and the correct approach to calculating the correct level of working capital

Adding Value During Ownership

• Selecting the right private equity investment - the 5 critical issues for sponsors

• Portfolio fit – what about style drift

• Management - what do PEs look for in the management team?

• The new value-creation model – 4 key areas

• Operational improvements – 6 aspects

• 7 Methods PE can add value via teaming up with executives

• The operating partner model (3 approaches)

• The operating partner model in practice – “typical” role

• The increasing importance of Artificial Intelligence and Machine Learning

Liquidity Events

• Hard exits vs soft exits

• Exit strategies – using the dual or triple track to enhance the value

• IPOs – pros and cons

• Sale of equity – partial vs complete sale

• Soft exits – a useful way of enhancing returns

• Case Study: Discuss the pros and cons of a dual/triple track exit strategy and the key issues for both the PE and management

Key Issues for Sponsors

• Structuring the equity: Sweet equity and the Institutional Strip (loans, preference shares)

• Structuring and funding the “Sweet Equity”

• Structuring the “Institutional Strip

• Typical returns

• Review of a Model

Case: Using a model to derive the Sweet Equity and the Institutional Strip

Structuring the payment waterfall:

• Issues for management

• Differences in primary and secondary deals

Equity ratchets:

• Rationale, structure

• Pros and cons of positive vs. negative stepped vs. linear

Differences between primary and secondary LBOs

Case: Review of a model with different ratchet options

Key Issues for Management

• Multifaceted role and duties of management: Issues vis-à-vis role as director, employee, shareholder, warrantor

Key documents and terms:

• Shareholders’ agreement vs articles/statutes (pros & cons)

Critical issues in the investment agreement:

• Good vs. bad leaver

• Management warranties

• Equity – valuation issues pre-exit (why “fair value” is dangerous)

• Transfer issues – drag, tag-along rights

Critical issues in the service agreement:

• Restraints

• Termination

Case Study: Review of different good and bad leaver clauses

Day Two

Developing the Optimum Financial Structure

• How to optimise the capital structure & why maximising debt is dangerous

• Using cash flow to gauge debt capacity

• Using EBITDA multiples to measure senior and junior debt capacity

• The role of junior debt in the capital structure

• How and why the equity buffer affects debt structuring

• Debt profiling - striking the right balance between amortising and bullet tranches: Impact on leverage

• How it affects ‘headroom’ (i.e. the ‘cushion’)

• How different lenders approach this – role of reinvestment risk

Deriving the private equity funding structure:

• Funding uses

• Funding sources

Senior Debt: Key Facilities & Issues

• “Typical” terms

• The main facilities in the loan

• PE Financing working capital: RCFs – why they matter and typical pitfalls

• ABL as a viable alternative

Financing capital expenditure (what about operating leases?)

Financing acquisitions (Incremental/Accordion facilities)

Junior Debt

• When and where to use junior debt

• What type of junior debt

• Mezzanine key terms: Use an application

• The rationale of warranted vs. warrant-less mezzanine

• “Typical” terms

Second lien loans:

• Use and application

• “Typical” terms, pricing & leverage covenants

PIK:

• Use and application

• PIYW/ Toggle vs PIYC

• “Typical” terms and pricing

• Pros and cons for sponsors

Case Study: structuring a deal with junior debt

Unitranche/Direct Lending Financing

• Review of the various market structures: Classic vs FOLO unitranche

Use and application

Pros and cons of direct lending / unitranche

“Typical” terms, pricing & leverage covenants

How it is different from other senior/junior structures

High Yield Notes

• Spectrum of instruments

• Use and application

• Pros & cons of high yield vs loans

Negotiating the Debt Package: Lender vs Borrower Approach

• Step 1: How to identify the borrower’s objective

• Step 2: Identifying the key requirements for the borrower

• The Lender’s approach to credit decision: measuring debt capacity

• security over assets

• exit routes

Key areas of the loan facilities:

• The four deal scenarios & how they interact

• The “Permitted” baskets

“Typical” financial ratios/covenants:

• Cash flow cover

• Leverage

• Interest cover

• Capex

Case Study: Reviewing a capital structure and how different instruments can be used to optimise the capital structure, provide more headroom and handle CAPEX

Training Objectives

• Overview - Understand the dynamics of the private equity market and all forms of leveraged buyouts including Leveraged Buyouts, Management Buyouts and Sponsorless LBO. It covers who the key players are in a leveraged deal and how their motivations affect the deal.

• Structuring the Deal – The course provides a framework or toolkit for participants (from all jurisdictions) to identify the critical structuring issues that the parties need to address a deal of private equity. Participants will be able to use this toolkit to determine how to structure LBO deals in any jurisdiction (or not as the case may be!)

• Subordination and Ranking – LBOs include layers of debt (even if only senior is included - as the PE will often use loan notes). In this context, participants will learn why subordination matters, the various ways in which it can be achieved and the critical aspects of inter-creditor agreements.

• Debt Financing Options – There is a very wide range of funding instruments used in LBOs but not all are suitable for every deal (e.g. the second lien is used only in very large syndicated LBOs). Participants will learn about the various instruments, their use and application and the key terms and conditions which attach to each instrument.

• Debt Capacity and Profiling – The objective of an LBO is to optimise, not maximise, the debt. The programme will guide you with case studies and models, on how this can be achieved using the various instruments in LBOs.

• The Lenders’ View – Debt lies at the heart of any LBO and the programme will provide detailed insight into the key issues lenders consider in approaching the debt package. Not all lenders are the same: institutions, banks and direct lenders all approach matters from differing angles and it is essential to understand these differences. The programme includes a private equity investment case study and term sheet allowing participants to role-play as a lender.

• The Sponsor’s View – PE firms approach deals from a very different perspective to corporate. The programme identifies the three main value drivers and other ways in which PEs generate value (value creation 102)and goes on to describe the criteria used to evaluate private equity deals and, post-acquisition, the methods in which they create value.

• Equity Financing – The key issue for management and the PE. Our course includes a model which illustrates how the parties structure the ‘Sweet Equity” and the “Institutional Strip”. There are subtle, tax-driven, variations between the UK and the EU which are also discussed. The rationale for, and different ways of structuring, Equity ratchets are also discussed and illustrated with a Model.

• Management – Studies have shown management team, and not the debt, is the key ingredient to a successful deal. The programme describes the essential attributes PE firms look for in the management team and the other key issues that Management and PE need to navigate (e.g. Good and Bad Leaver, Warranties). The key to creating the right incentives depends on aligning the interests of both ‘sides’ and striking a balance between the competing interests of management and the PE in terms of deal economics and for the PE deal protection, to ensure management is suitably incentivised.

Training Course Summary

Our leveraged buyout training programme will review the impact of the draft ECB guidance on leveraged transactions. It provides participants with a comprehensive view of private equity transactions, particularly the various types of buy-outs (e.g. LBOs, MBOS). The programme takes participants through all the major stages of the deal; from entry, through the operational phase to exit (liquidity events). In doing this the course provides insight into how the PE firm can add value to the process at each of the three major stages. To do this, it approaches PE from the respective perspective of all the main protagonists; Private equity professionals, lenders and other providers of debt financing; the various professional advisers (lawyers, accountants in due diligence or audit), corporate finance advisors and management teams looking to enter or exit the market.

It will also appeal to investors who may wish to invest directly (co-invest) or indirectly (via funds) in different parts of the debt or equity capital structure, such as pension funds, insurance companies, private family offices and corporations that are trying to understand the radically different business model of their PE competitors.

Whilst simple in theory, the highly competitive nature of the PE market means that adding value can no longer be achieved by leverage and reliance on rising markets.

The course covers the three key stages of PE value creation. Stage 1 is the acquisition, where it is vital to structure the transaction optimally in terms of both the offer to minimize risk. Disastrous mistakes can be made ab initio by failing to understand the main risk areas of the equity bridge (i.e. the value traps from enterprise value to equity value) or in the completion method (e.g. locked box rather than completion accounts). Developing the optimal capital structure is critical as it is essential to use both the correct level of debt and the most appropriate type of debt that will allow the company to achieve its business plan (e.g. organic growth or buy and build).

The second stage requires the PE firm to add value during the operational phase and here there is much the PE firm can do in terms of focusing on operational improvements. These do not occur in a vacuum and require the best management team. Top-quartile PE firms have large in-house teams to assist them in the process, but smaller firms can achieve the same results through different “operating partner” models. In the current seller-friendly environment, deal origination is another key point of differentiation between top-quartile teams, and the course reviews various ways of approaching this issue.

The third and final stage relates to liquidity events; however PEs have the luxury in the current market of opting for soft as well as hard exits to generate value for LPs.

Our leveraged buyout training programme adopts a pan-European approach to the topic but the presenter has experience with PE in other jurisdictions including the USA, Asia Pacific and Africa. Reference will be made to current trends and data in the markets across Europe.

Participants will be provided with numerous case studies to reinforce the various aspects and will also be provided with an LBO model, which will be used to structure a transaction. After the course is completed, participants will receive several other private equity-related models (e.g. how to calculate warrants and ratchets) as well as a current review of debt trends in the debt market.