私募股权并购.pdf

PLC July 15FeaturePrivate equity transactions,formerlymore commonly known as venture capi-tal transactions,cover a variety ofarrangements that have one commonfeature:the source of the money that isfunding the transaction.This source isusually a fund(the investor)establishedto invest specifically in unquoted securi-ties(private equity)rather than in pub-licly quoted securities or governmentbonds.Private equity transactions in-clude the provision of funding for busi-nesses starting from scratch(start ups),the injection of funding into existingbusinesses to help them expand(devel-opment capital)and the funding of pur-chases of businesses by managementteams(buyouts).This article,the first ina four-part series,focuses on buyoutsand looks at:The different types of buyout.The parties involved.The sources of finance used to fund abuyout,the process by which thetransaction takes place and the docu-ments required.The exit process for investors.Private equity transactionsAn overviewIllustration:Getty Images In the first of a four-part series,Simon Beddow andKarl Taylor of Ashurstprovide an overview ofthe main elements ofprivate equitytransactions.16PLC July FeatureThe remaining parts of this series willdeal in more detail with the equity as-pects of buyouts,the specific issues thatarise in relation to debt finance and thetax considerations.BUYOUTSA buyout is the process whereby a man-agement team,which may be the exist-ing team or one assembled specificallyfor the purpose of the buyout,acquires abusiness(Target)from Targets currentowners with the help of equity financefrom an investor and debt finance fromfinancial institutions(see“Financing abuyout”below).To achieve this,agroup of new companies will be estab-lished(Newco group):at its moststraightforward,this will consist of atop company(Newco),which will act asthe investment vehicle for the investor,and a wholly-owned subsidiary ofNewco (Newco 2),which will act as thepurchasing and bank debt vehicle(seeboxes“UK buyout structure”and“Cross-border buyout structure”).Buy-outs fall into one of the following cate-gories:Management buyouts(MBOs).An in-cumbent management team buys thebusiness it manages.These are tradition-ally instigated by management ap-proaching Targets owners with a pro-posal to acquire the business.This mayhappen where management are runninga division of a larger group of companiesand feel that they are not receiving thesupport or investment they require to en-able them to achieve their business goals.This management-led approach is stillrelatively common on smaller MBOs(typically those for less than 50 millionconsideration).Where management initiate the buyoutprocess,they must be extremely carefulto ensure that they do not breach any du-ties of confidentiality that they owe totheir employers(for example,by disclos-ing financial information or trade secretsto potential funders).They should alsobe wary of breaching their service con-tracts(for example,by failing to devotetheir energies to Targets business but,instead,spending their time trying topursue a buyout).Management should seek appropriate le-gal advice as soon as possible and,wherepossible,obtain their employers permis-sion to pursue their objectives.The em-ployers permission usually involvesgranting a waiver of any breach of man-agement service contracts that wouldotherwise occur.Clearly,the employercan remove this waiver at any time andrequire management to desist from pur-suing the buyout during working hours.Management buy-ins(MBIs).A team isassembled for the purposes of making anacquisition,where a business may havethe potential to achieve significantgrowth but the incumbent managementteam is either uninspiring or not inter-ested in buying the business.Typically,an MBI involves investors and interme-diaries identifying a group of individualswith the appropriate attributes to under-take an MBI and then matching themwith,and transplanting them into,an at-tractive Target.Buy-in/management buyouts(BIMBOs).A hybrid,combining an existing man-Mezzanine bankVendorShares andloan notesSharesDebtDebtConsiderationInter-companyloanUK buyout structureNewco 2ManagementSenior bankEquity fundsTargetNewcoPLC July 17Featureagement team with an external manage-ment team.For example,the investormay take the view that management aremainly good,but lack a finance directoror other key individual.Institutional buyouts(IBOs).An in-vestor independently sets up Newco toacquire Target and gives Targets man-agement a small stake in the business ei-ther at the time of the buyout or after itscompletion.The investor may retain ex-isting management or may bring in newmanagement at a relatively late stage inthe transaction.Many of the components of all privateequity transactions are the same.How-ever,the size of the investors proposedstake in the business will affect the ap-proach that it will take.Buyouts largely take place with the pri-vate equity fund taking a majority stakein Newco.Start ups and developmentcapital usually involve the private equityfund taking a minority stake.Broadly,the investor will take a more relaxedview about the controls that it requires ifit holds a majority stake.Where it takes a minority stake,the in-vestor will be much more concerned toensure that it has veto rights over whatthe business does,can protect its direc-tors from dismissal,can control the ap-pointment of other directors to Newcosboard and can force an exit from thebusiness at some point in the future(see“Exits”below).PARTIES A typical buyout will involve the follow-ing participants:The management team.The team tendsto be confined to a small number ofcore managers until the buyout hasbeen completed.On larger buyouts,this core team is often extended aftercompletion to bring in second tier man-agers.Managements lawyers.The role ofmanagements lawyers is usually re-stricted to advising management on theirequity investment in Newco,their ser-vice contracts and any director-relatedissues that arise,together with ensuringthat the contract for the acquisition ofTarget is not unduly onerous for man-agement.On smaller management-ledbuyouts,managements lawyers oftenhave a more significant role and mayconduct the negotiations on behalf ofNewco.Where this is the case,the role ofthe investors lawyer will be confined toreviewing the acquisition work under-taken by managements lawyers andleading on the production of the equityinvestment documents(see“Docu-ments”below).Mezzanine bankNewco UKVendorNewco overseasDebtInter-companyloansConsiderationfor Target UKInter-companyloanDebt in foreign currencyConsideration forTarget overseasCross-border buyout structureTarget overseasTarget UKShares andloan notesSharesDebtManagementSenior bankEquity fundsNewco HoldingsNewco 218PLC July FeatureThe investor.The transaction will usu-ally be run by one or two executives fromthe investor,whowill play a central rolein negotiations relating to all elements ofthe deal.The investors lawyers.Lawyers for theinvestor will normally be heavily in-volved in all aspects of the transaction.They will prepare and negotiate the doc-uments relating to the equity element ofthe transaction with managementslawyers(see“Documents”below).Theywill also act as lawyers to the Newcogroup on its acquisition of Target fromthe seller(except on smaller buyoutswhen this may be done by manage-ments lawyers).This will involve carry-ing out a due diligence investigation ofTarget,negotiating the acquisitionagreement with the sellers lawyers andnegotiating the bank facility agreementand bank security documents with thebanks lawyers(see“The process”be-low).The bank.The bank is responsible forproviding the senior debt(see Glossary).The banks lawyers.Apart from draftingthe banking documents,the bankslawyers will generally also review thedue diligence reports produced byNewcos advisers,keep an eye on the ac-quisition agreement and review thesellers disclosures against the war-ranties.Reporting accountants.The investorwill usually appoint a firm of accoun-tants to produce a long-form report onTarget,review managements businessplan and examine managements finan-cial projections.Environmental auditors.The investorwill often ask environmental auditors tocarry out an environmental risk assess-ment of Target to assess whetherprocesses carried on by it comply with allrelevant environmental laws andwhether any contamination is occurring.Buyers actuaries.If Target has a finalsalary pension scheme,the investor willusually ask actuaries to value the pool ofmoney representing pension contribu-tions paid by employees to ensure thatthe fund is sufficiently funded to honourpension obligations to employees retir-ing in the future.Sellers actuaries.The seller will usuallyappoint actuaries to review the valuationof the pension scheme fund produced bythe buyers actuaries.Insurance brokers.The investor may ap-point a firm of insurance brokers to re-view Targets insurance cover and toproduce a report recommendingwhether any changes should be made.Market consultants.On larger buyouts,the investor may appoint a firm of eco-nomic consultants to produce a reporton the market in which Target operates.Investment bankers.On the very largestbuyouts,the investor will normally ap-point a firm of investment bankers tomanage the transaction and to providestrategic advice on the negotiation of thedeal,both with the seller in relation tothe sale process and with the banks in re-lation tothe finance for the deal,particu-larly if a high yield bondis to be issued.On start ups and development capitaltransactions,the team is often muchsmaller,consisting of:Management and its lawyers.The investor and its lawyers.Managements accountants,who willbe asked to advise on tax and struc-turing issues.On technology investments,it is not un-common for a technology consultant tobe engaged to advise on the functionalityof the software supporting manage-ments business plan.FINANCING A BUYOUTThe acquisition of Target by Newco 2 isusually financed from two main sources:Equity financeFunds established to invest in private eq-uity transactions obtain their moneyfrom a variety of sources,including insti-tutions(such as pension funds,banksand insurance companies),companies,individuals and government agencies(see feature article“Private equity funds:US and UK features”,www.practi- investor will subscribe for ordinaryshares in Newco and will require man-agement to do the same so that they havean incentive to make the business suc-ceed.The amount invested by the in-vestor will generally be calculated so thatthe price per share paid by managementand by the investor is the same.An excep-tion to this is where there is a ratchetwhich operates in favour of manage-ment.In these circumstances,for tax rea-Advantages of loan notes The payment of interest on loan notes(in contrast to the payment of dividends onpreference shares)is made before tax.This amounts to a tax saving of approxi-mately 30%of the interest payment.Can be secured,but will be subordinated to any senior or mezzanine debt(see“Pri-ority”in the main text).Repayment of loan notes is not subject to the restrictions of Chapter VII of the Com-panies Act 1985,unlike the redemption of preference shares.Advantages of preference sharesPreference shares give Newco the appearance of being less leveraged,improving itsbalance sheet.This may be important depending on the business or regulatory envi-ronment in which Newco operates.Loan notes or preference shares?PLC July 19Featuresons,management will usually pay a pre-mium which reflects the maximum valuetheir shares might be worth if the ratchetwere to operate to its fullest extent.Any further funds invested in Newcowill usually be by way of loan notes,loanstock or some form of discounted note(loan notes)or preference shares.Loannotes are currently more popular,sincethe tax benefits attaching to preferenceshares under section 592 of the Incomeand Corporation Taxes Act 1988 wereabolished by section 19 of the Finance(No 2)Act 1997.In addition,providedthe transaction is structured correctly,loan notes are more tax efficient for theNewco group it will get a deductionagainst profits for any interest payableon the loan notes on an accruals basisacross the term of the loan.Also,interestand capital repayments are less difficultto achieve than dividends and repay-ments of shares(see box“Loan notes orpreference shares?”).So,for example,management may be re-quired to invest 100,000,having agreedwith the investor that this will providemanagement with 10%of the equity inNewco.If the investor needs to invest50 million in order to fund the acquisi-tion,this would be split as to 900,000for an investment of equity shares inNewco(that is,the same price per shareas that paid by management,assumingno ratchet)with the remaining 49.1 mil-lion being invested in the form of loannotes or preference shares.The equity share capital of Newco heldby management is often referred to assweet equity while the combination ofequity share capital and loan notes inNewco held by the investor is oftencalled the institutional strip.On somebuyouts,a wealthy manager may investin both the sweet equity and the institu-tional strip,which means that for themoney in excess of the amount requiredto purchase his percentage of the sweetequity,he will be treated as if he were amember of the investors investing syn-dicate.If a manager acquires shares in connec-tion with his employment which are sub-ject to good leaver/bad leaver provi-sions,the growth in value of those shareswill,in certain circumstances,be subjectto income tax and national insurancecontributions(Schedule 22,Finance Act2003)(see box“Restricted securitiesregime”).Debt financeDebt finance will usually form thelargest part of the required funding in abuyout.The principal source of this debtis senior debt which is usually providedby banks.The principal component ofthe senior debt will tend to be a securedterm loan to finance the acquisition.Thesenior debt may also include a securedworking capital facility.Often,there is a secondary source of debtfinance in buyouts(junior debt).Juniordebt,which is any debt that is not seniordebt,will often be provided in the formof mezzanine finance,so called because,in terms of risk and reward,it lies some-where between equity capital(unsecuredbut with the potential to earn large re-wards)and bank debt(well-secured butwith lower returns and not carrying thechance of capital growth).In small dealsjunior debt may be provided by otherforms of subordinated funding such asan investor loan or a sellers loan note.Mezzanine funds are invested as debtcarrying a higher rate of interest than se-nior debt,usually 3 to 4%over thebanks base rate,because the mezzaninesecurity will rank behind the senior debtsecurity.In addition to carrying interest,the mezzanine finance will often also begranted rights to subscribe for equityshare capital in Newco(warrants),oftenknown as an equity kicker.The providerRestricted securities regimeIf a manager acquires