I'm interviewing at this PE firm that seems to have made it a policy that they are acquiring companies with 10% equity and 90% debt. They are acquiring companies with about $3-5 million dollars in revenue in the consumer goods market in high volumes. I was wondering whether or not this was low. I've heard that 10% equity is the minimum that a deal should be done at. What percentages of equity and debt do you mainly see in your deal flow?
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Sounds like micro-cap PE. The datapoints you'll get here might not be as relevant.
The only debt instrument i'm aware of that will give you 90% leverage on risky assets like this (i.e. small consumer companies) is SBA debt, which comes with a very unattractive personal guarantee for the full amount. If this firm isn't using SBA, then very curious to how they're doing it.
For your reference - Debt capitalization in traditional buyout ranges from 40% to ~60-65% typically. Referring to acquisitions >= ~$50mm TEV.
I didn't end up taking this job. However, this and all the other responses were super helpful. Essentially, as I looked into this company more and more, it appears to be micro-PE rollup where they are bundling hundreds of small consumer products companies into an overarching brand. I assume there is some sort of personal guarantee at some level of the company, but I never definitively found out. I don't want to drop the name of the company out of respect, but the one massive hangup I have is there is a massive tail risk that could destroy the company, and as far as it seemed when I was interviewing, they were doing nothing to hedge against it (or at least protect themselves from it). The PE firm was basically taking over smaller companies that were essentially mom and pop-shops that got out of hand, and using its resources to instantly scale them. Through their own metrics it was pretty much free money. However, the massive tail risk was always there.
They are just using SBA debt which has PGs. It means the partners could make stupid decisions due to the PG hanging over their head.
Like the poster above pointed out you’re usually looking at 40% to 60% unless you go turnaround…
Typically, if your debt is syndicated by banks (e.g., BMO, CS, GS, JPM), minimum equity (as % of capitalization) is 35%.
If you're levering beyond that, likely micro-PE and very high interest rates.
If you're buying a business for 7.0x EBITDA, you could only lever up to 4.55x (65% of 7.0x) and would have to put a minimum equity check of 2.45x or 35% of the 7.0x purchase multiple.
Give me 6x net debt to EBITDA and I'll deliver you all glory known to God.
Depends on the industry. Lower-multiple, lower-beta businesses, you may see up to 75%. Whereas in SaaS it might just be 15-20% on an ARR loan.
30-35% minimum equity
You can do zero equity ABL deals if you find an aggressive lender, but usually requires a FILO coming in above the ABL.
That is definitely not industry standard and the firm can get away with it given the size. Usually the cap for larger deals is like 6-7x leverage EBITDA but it's super subjective deal to deal.
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