Modeling minority investments
Hey guys, had a handful of questions regarding modeling minority investments before I hit the desk at my new role in a few weeks (all of my practice has been with majority stakes)
- What are the differences in how you approach the sources & uses table, or other parts of the model not related to the 3-statements, when it comes to primary vs secondary investments? ie - a growth equity investment of primary capital where proceeds are used to fuel growth vs buying a minority stake where proceeds are used so a founder can take some chips off the table? Do these roughly look the same in the transaction assumptions in terms of structure?
- In terms of structuring the S&U, is it most common to just have a large equity roll that represents the majority stake you aren't acquiring? (as you still need to value to full business of course)
- How is existing debt treated if you are, for example, acquiring a 30% minority stake? I know that in a more traditional, majority-control LBO model, existing debt shows up on the uses side as "Repayment of existing debt" and then maybe you have existing cash on the sources side, or ... you just put the enterprise value on the uses side to account for it. How does this look under a minority deal? I know that in practice, this would come down to the actual terms of where the cash is going, etc, but any generalization here would be helpful
- Continuing on the scenario of buying a 30% stake, would you generally pay less of a premium because there isn't a control element to it?
Thank you
A few suggestions:
Also unlike an LBO where the equity check is a plug with S = U, in a minority investment the equity check is fixed and the cash to balance sheet is the plug (ie equity check - founder cash out - transaction fees - debt refinancing).
Following
To put the above concretely, you can adapt this to your standard LBO template pretty easily:
This is an awesome reply - thank you so much for your insight. One follow-up question if you don't mind: in the S&U detail for a secondary transaction, when you refer to "New Investor equity", this is the PE firm's new equity? When you build out the S&U then, are you only including the portion of the Enterprise Value that was transacted upon? For example, let's say the PE firm buys 30% of the business at a $100 valuation. Would the S&U, if we simplify everything for no fees and no debt, look like the below?
Sources
Uses
What's your rationale then for not including the $100 Enterprise Value on the uses side (if we assume its a cash-free debt-free deal)? For example, how would you categorize the line in brackets below? Or would you put the entire EV in the Uses and not distinguish it?
Sources
Uses
Thank you for your insight and apologies if I'm overcomplicating anything!
You can do it either way, it doesn't matter. S&U is nothing but a tool to make sure you're tracking all pieces of the transaction. But sure, easier to make sure by including the rest of the company. So yeah, it could be: Sources = new investor equity + rolled equity + rolled debt; uses = buy out existing shareholders + rolled equity + rolled debt + fees (or in ur example, no debt or fees). The rolled stuff is redundant, and isn't actually transacting, but helpful to bridge to EV.
Adding here - if we have a primary would this directly go to opening balance of my cash flow statement? And for returns we would just work with post money % ownership right?
Thank you everyone for the insights. I will have an interview with a Growth and Minority investing shop so understanding how important it is to use DCF and arrive at 20% for instance of an equity holding. If anyone has any case study or any public resources, please share. Thank you kindly!
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