Lecture+5F+LBO+Introduction.pptx - KIMEP Leveraged Buyouts(LBO Introduction Leveraged Buyouts KIMEP LBO An acquisition of a target a company division

Lecture+5F+LBO+Introduction.pptx - KIMEP Leveraged...

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KIMEP Leveraged Buyouts (LBO) Introduction
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KIMEP Leveraged Buyouts LBO An acquisition of a target ( a company, division, business, or collection of assets) using debt (60% - 70%) to finance a large portion of the purchase price The remaining portion of the purchase price is funded with an equity contribution (30% - 40%) by a financial sponsor. High level of debt is supported by target’s projected cash flow and asset base The debt provides leverage and tax saving benefits LBO Sponsor’s goal Realize an acceptable return ( on average more than 20% annualized return within 5 years ) on its equity investment upon exit, typically through a sale or IPO of the target 2
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KIMEP 3 LBO Candidates Targets with Strong, stable, and predictable cash flows to be used to service and repay debts during the investment horizon (from acquiring the target until exit) Strong asset base (can be used as collaterals for the debt financing and divested individually) Leading and defensible market positions (strong customer relationship, brand power and market power) Growth opportunities Efficiency enhancement opportunities (cost competitiveness) Low capital expenditure requirements Proven management team (super management capacity) Low D/E ratio
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KIMEP LBO Participants Key participants of LBO Financial Sponsors Investment Banks Bank and Institutional Lenders Bond Investors Target’s Management (MBO) 4
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KIMEP 5 Financial Sponsors In general, providers of financing: Private Equity firms, Merchant Banking division of Investment Banks, Hedge Funds, Venture Capital Funds, Special Purpose Acquisition Companies (SPACs) They raise fund from third parties (pension funds, venture capital funds, insurance companies, endowments, sovereign wealth funds, and wealthy individuals) Invest their own money The raised capital is usually organized as a Limited Partnership Limited Partnership: structured as fixed-life investment vehicle General Partner (sponsor): Normally, 10% - 20% of total investment Manage the fund on a day-to-day basis Performs detailed due diligence on the target for valuation and develops financial models with appropriate purchase price assumptions Limited Partner: serves as a passive investor (blind pools)
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KIMEP 6 Other Key Participants Investment banks Provide financing and strategic advising (including financing structure) for both buy and sell sides Perform due diligence and internal credit process on LBO targets Provide financing commitment to the sponsor possibly through syndication (underwritten financing) Provide revolving credit facility and bridge loan as lead arrangers Banks and Institutional Lenders (Hedge fund, pension fund, insurance companies, etc.) Capital providers for the bank debts
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