If I have to include both common and preferred equity in the capital structure of an LBO I am building, what would be a reasonable amount of preferred equity to use? If I am going for about 60% debt and 40% equity, how much of the 40% should be common vs preferred?
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Virtually all preferred...like 99%. Unless you like dilution from management's performance options.
Is this really the case? Several of our deals have allowed sellers to invest pari passu to new money (10-25% roll).
Typically, "new money" in receives preferred equity and any rollover receives straight common. The most common rollover percent is 20%. Therefore, 80% preferred from sponsor contribution and 20% rollover equity in the form of common would be reasonable. Obviously, there are limitless structures and combinations of ways to build the pro forma equity account, and this is just one example.
can someone elaborate on this? wouldn't the sponsor's return be capped at the dividend yield of the prefs with management taking all the upside?
can someone elaborate on this? wouldn't the sponsor's return be capped at the dividend yield of the prefs with management taking all the upside?
preferred equity can also be in the form of participating preferred where it will retain its liquidation preference and dividend in the waterfall but also participate in any common equity upside (diluted by management incentive options)
Sponsor invests in strips of preferred and common.
I think it's one thing if you're modeling buying from another sponsor who isn't rolling, and another if you're buying from a founder/family-owned business who is rolling a significant stake. We definitely let founders/managers who are rolling invest pari passu in the preferred...
Roger that. Thanks for the clarification.
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