AI PE Buyouts

Question 1

VC

Answer 1

when you invest into a start-up and have a minority stake

Question 2

Buyout (LBO) Leveraged Buyout

Answer 2

• full control
• target established companies
• debt financing

Question 3

Operational engineering

Answer 3

how you help the target company

Question 4

governance engineering

Answer 4

align interest btw. managers and investors into the company

Question 5

financial engineering

Answer 5

how to raise debt for the LBO

Question 6

How do you do a buyout?

Answer 6

You make a shell company and you put in debt and equity

then you take the shell company and you merge it with the target company
- the assets of the target company are used as collateral because the debt of the shell company are loaded on the Balance Sheet of the target company. (The target company basically pays the debt and loads it on).

Question 7

How much debt in comparison to equity is used?

Answer 7

About 50% but earlier more than 50% debt

Question 8

Why use so much debt?

Answer 8

• tax shield
• high returns because you put a little equity inside and that grows
  (e. g. invest 100E and get 200-100 when selling–>100
  vs. invest 50 equity and get 200-50E when selling–> 150; you increase your multiple on investment)
• when the company is financed with a lot of debt the manager of that company has to work like crazy because the banks are after the debt. The manager (of the target company) has to repay the debt. –> disciplining power (putting pressure on managers to work hard)

Question 9

second buyout wave 2006-20017

Answer 9

because debt was very cheap back then

Question 10

when was the first wave?

Answer 10

first wave 1980s

Question 11

How many M&As are global buyouts?

Answer 11

about 10-15%

Question 12

The carrot

Answer 12

• management will invest a significant part of their personal wealth in the transaction

Question 13

the stick

Answer 13

• debt is loaded on the company. To control the managers

Question 14

What companies undergo buyouts?

Answer 14

Companies that can load on a lot of debt

- companies that can have more profits when it is made more efficient

Question 15

MBO

Answer 15

management buyout.

Management of a company want to buy out the existing owners and look for the help of PE firm to help them do that.

Question 16

Secondary buyout

Answer 16

do the same again as in the first buyout

Question 17

Public-to-private buyouts

Answer 17

when you take a public company private

• when the company is undervalued
• limited visibility (nobody knows that the company is on the stock exchange so nobody buys)
• high regulatory costs

Question 18

debt a

Answer 18

most senior claim you can claim a lot of the company

Question 19

mezzanie debt

Answer 19

very risky debt

Question 20

PIK loans

Answer 20

loan of 100 and pay 5% interest. But you don’t pay yearly but the interest accumulates. At the end of the loan you pay back the principle and the accumulated interest.

Question 21

As a PE manager how do you do debt financing?

Answer 21

• ideally you want to use as much debt financing as market conditions allow you to.
  1. go to the banks and ask for term loans. (cheap debt) (most money comes from here term loan A, B and C )
  2. high yield loans.
  3. further down the senior debt levels. (more expensive debt, high interest has to be paid)

-> but don’t overburden company with debt

Question 22

What happens now

Answer 22

debt is really cheap and EBITDA entry multiples are at a record. Competition is heating up and when you overpay you get worse returns. Money is chasing the deals.

Question 23

What happens now

Answer 23

debt is really cheap and EBITDA entry multiples are at a record. Competition is heating up and when you overpay you get worse returns. Money is chasing the deals.

Question 24

Why does the board size decline after a buyout?

Answer 24

• because a small board is more efficient (more agile and faster, outsiders are not needed on the board anymore because the PE now is major shareholder)