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Advanced Structuring of LBOs & Private Equity Transactions

A comprehensive examination of PE – reviewing the 3 stages from PE, lender, advisors, management and investor’s perspective

Advanced Structuring of LBOs & Private Equity Transactions Course

A two-day course

  • The trainer has deep experience of private equity having advised on the first MBO over 30 years ago
  • The trainer has had exposure to private equity from a global perspective having presented programs to KPMG, EY, Investment banks, Commercial lenders and PE firms in Europe, Africa, North America, Asia and Australasia
  • The trainer’s career also includes stints in commercial and investment banking, accountancy, tax and law thus providing insight from a wide range of perspectives
  • Through the trainers wide experience he has developed a 360 degree perspective of private equity from the perspective of lawyer, advisor to PE firms, advisor to senior and junior debt providers and from a legal perspective
  • Through the trainers role as a Senior Consultant to Grant Thornton and as a Senior Advisor to KPMG Finland, he retains exposure to PE transactions

  • Overview - Understand the dynamics of the private equity market, all forms of leveraged buyouts including Leveraged Buyouts and Management Buyouts and Sponsorless deals. It covers who the key players are in a leveraged deal and how their motivations and affects the deal
  • Structuring the Deal – the programme provides a framework or toolkit for participants (from all jurisdictions) to identify the critical structuring issues that the parties need to address in structuring the deal. Participants will be able to use this toolkit to determine how to structure 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 intercreditor agreements
  • Debt Financing Options – There are a very wide range of funding instruments used in LBOs but not all are suitable in every deal (e.g. 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 in an LBO is to optimise, not maximise, the debt. The programme will provide guidance 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 case study and term sheet giving participants an opportunity 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) goes on to describe the criteria used to evaluate deals and, post-acquisition, the methods in which they create value
  • Equity Financing – The key issue for management and the PE. The programme 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 where 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 both ‘sides’ and striking a balance between the competing interest of management and the PE in terms of deal economics and, for the PE deal protection, to ensure management are suitable incentives.

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 value
    • Liquidity events pre exit - Using soft exits recaps/refinancing to extract value
    • How Equity bridges are used to enhance 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 – key principles
  • Ranking & 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 and 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 investment - the 5 critical issues to 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 to 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 & terms
    • Shareholders’ agreement vs articles/ statues (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 funding structure
    • Funding uses
    • Funding sources

Senior debt: key facilities & issues

  • “Typical” terms
  • The main facilities in the loan
  • Financing working capital
    • RCFs – why they matter & 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 & covenants
  • PIK
    • Use and application
    • PIYW/ Toggle vs PIYC
    • “Typical” terms & 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 & covenants
  • How it differs 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’s 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

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring a number of high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross border M&A team prior to being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in a number of deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on their privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons) at UNISA.

The programme will review the impact of the draft ECB guidance on leveraged transactions.

This programme provides participants with a comprehensive view of private equity, 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 corporates who are trying to understand the radically different business model of their PE competitors

Whilst simple in theory private equity, 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; the acquisition, where it is vital to structure the transaction in the optimal fashion 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 a critical as it is essential to use both the correct level of debt for 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 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.

The programme adopts a pan-European approach to the topic but the presenter has experience of PE in other jurisdictions including, 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. Post the course participants will receive a number of other PE related models (e.g. how to calculate warrants and ratchets) as well as current review of debt trends in the debt market.

  • I very much enjoyed this course since it gave me a very good refreshment of my knowledge. The trainer is a very experienced LBO and Private Equity expert providing historic and actual information.

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