Decreasing Equity Risk in an LBO
Studying technical questions for off-cycle interviews and came across the question: "How could you (the sponsor) decrease the risk of your equity in an LBO?" I know one option is you could structure your investment with an earnout, but imagine there are several potential answers to this question that I don't know off the top of my head.
Structure in general is a way to de-risk on the front end. A common example besides the earn-out you mentioned is participating preferred equity (provides 8% annual yield, plus upside).
There are also some legal mechanisms (specific rights clauses - or lack thereof, dilution ability o non-sponsor equity, etc.).
Not sure exactly how the question was phrased, but something like a dividend recap or leveraged share redemption would reduce equity risk during the hold.
Helpful, thanks
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