Well the bank downgrades were just the icing on the cake this December. At this point I'm expecting a slice of pizza for all my hard work this year. Anyways...
I was hoping someone in private equity could shed some light on deal structuring. I have been working on the banking side with a few funds who are making asset purchases at rock bottom prices, but I am even more impressed by the deal structuring (mostly midsized industrials). What have been other's experience with deal structuring?
Has anyone ever seen derivatives for private company investments where the exit strategy is sale of the company? I was thinking maybe something based on future EBITDA, but this is highly subject to manipulation. Unlike the public equity markets, you cannot structure a derivative on an equity price, as it is not traded or observable. Is there any market out there that supports any type of guarantee from sellers?
Keep in mind that this is in the context of lower middle market where things are much less commoditized.
The only future-dependent component of purchase price I've seen is an earn out, which can be based on anything (EBITDA, sales, an agreed upon formula, etc.). As I'm sure you know (though others may not), earn outs are very common in the lower middle market.
There are CVR's, but I haven't seen them used outside of the Sanofi/Genzyme deal: http://biohealthinvestor.com/2011/02/defining-the-contingent-value-righ…
Otherwise, the only other thing I can think of when I hear 'guarantee from seller' are Reps & Warranties: http://www.woodruff-sawyer.com/webmail/Reps%20and%20Warranties_M&A%20Tr…
Never heard the term CVR before. The way it was described in the article, it sounds like a fancy way to say "earn out."
CVR's are somewhat common in smaller clinical stage biotech/life sciences transactions. Essentially allows the buyer to de-risk some of the asset given the clinical and regulatory risk inherent with biologics/therapeutics
Technical PE Deal structure question... (Originally Posted: 04/22/2010)
Hi all, basically I am trying to understand how the PEs account for their investments in their financial statements.
My understanding is:
Increases assets (cash coming in) increases liabilities (funds coming from pension fund)
Decreases cash (Asset) Increases Investment (Asset)
On re-valuation of the investee company, the value of this investment (Step 2) will increase and we'll have a corresponding gain on the income statements
Is that correct? Or is some other form of structure commonly used so that the investee companies wouldn't show on BX's balance sheet? Like off-balance sheet transactions as they are called.
Note: Blackstone is a purely hypothetical example above
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