Media / Investor Relations
Hess Group International Address:
J/F Kennedy Street 6 3106 Limassol, Cyprus
February 10th, 2020
Ranging from small deals to mega-deals, the majority of global invested capital were buyouts conducted by private equity funds. In the history of buyouts, there were many successful stories as well as failures, so buyouts are either admired or frowned upon by investors, regulators and governments.
Even though buyout funds will acquire controlling equity stakes in firms that will be restructured in terms of finance, governance and operational characteristics by the fund, the buyout investors must work with different stakeholders such as: management, debt providers etc. Buyout strategies are defined by three aspects: equity control, leverage and economic alignment. These will allow buyout funds to maximize their return on investment by making the right strategic and operational decisions. Let’s define these aspects.
When a PE fund makes a buyout, it often controls most of the economic and voting interests in the investee company. This does not necessarily mean that it will own 100% of shares, sometimes it is less than 50%- but the buyout fund has the right to dictate strategic and operational decisions. Now minority stake, control can be obtained through a coalition of investors sharing a similar approach to business or by special agreements.
The buyout fund can also apply leverage to a company’s capital structure, alter the management team, restructure its governance and reporting structures etc. Control is crucial when the business approaches the exit phase since the investors can initiate necessary governance upgrades, authorize additional spending when required.
Gaining control of a company usually means that there is a higher price for the stakes, especially when it has to do with private transactions of publicly listed companies.
Typically, buyouts are structured as LBO’s, where a huge portion of the transaction is financed through debt. It is a normal phenomenon for an investee firm’s capital structure to consist of 50-75% debt post-buyout, with equity funding the balance. The amount of debt depends on factors such as stability of cash flows, the company’s ability to generate cash flow, market conditions etc. Buyout funds analyze many different scenarios a portfolio company might take in order to understand various downsides and ways to reduce risk in an investment.
As mentioned before, the key is to align the interests of a portfolio company’s management team and the fund, this drives the success of PE’s in buyouts. Senior executives are rewarded with meaningful equity stakes in the portfolio company and extra perks upon successful exit. When managers participate in a buyout as owners, the goal of maximizing financial return is shared by those in charge of executing the fund’s investment plan and managing day-to-day operations at the portfolio company.
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Media / Investor Relations
Hess Group International
Address: J/F Kennedy Street 6
3106 Limassol, Cyprus