Sweet Equity
Hi all - would really appreciate some help on this one.
Probabaly q a basic question, but can't find anything online to answer it. How does Sweet Equity work in an LBO? Specifically, I recently was shown an LBO model, that had the use of funds totalling £4b (equity value plus net debt and fees), and the sources of funds equalling £3.85b, with £150m of sweet equity. That £3.85b was provided through a combination of a rollover, debt and sponsor equity. I can't square that off in my mind, because under my understanding, the amount put in by the management rollover, debt and sponsor equity has to equal £4b. I am not sure why this sweet equity acts as a source. Very happy to be given a basic conceptual understanding of sweet equity here. Won't be a case of teaching me how to suck eggs, as I clearly am not understanding it!
First both sources and uses balance = good
Second the sweet equity is just separated from the mgmt rollover since it is treated differently in the returns waterfall and and has different tax implications
Can you elaborate further on this how it works?
He doesn’t know what he’s talking about to be blunt
That doesn’t really make any sense. Sweat equity is the incentive for management in LBOS. It’s the result at the end of the waterfall with strip and sweet equity. Is it possible the ‘sweet equity’ on your sources side is the management’s roll over from the prior deal?
Thanks! Ok you may well be right. Separately, can you explain how one would model sweet equity in the transaction, assuming that the PE fund wanted to provide sweet equity at closing?
Basically you create a share class with certain rights. For example the sweet attracts x% of proceeds above hurdle y. Those shares are worth very little at the start so you don’t really have to worry about their cost (although you do need to model the management investment more broadly and that would include this). Then at the end of the deal there is a proceeds waterfall with the strip divided between sponsor and mgmt net of whatever the sweet attracted. Does that help?
Wouldn't sweat equity just be options and not shown on the S&U at all?
Not in European deals. Sweet equity is in the form of actual invested equity that approximates options because it’s levered by both the debt and the preferred equity stack (sponsor equity usually goes in as a “strip” of preferred + common).
It’s for management teams you doofus
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