Leverage Minority Investment
Hi WSO,
I am constantly asking myself how to efficiently leverage minority investments (if possible).
For example, General Atlantic has recently acquired a minority stake in Creative Planning (Feb-20). Could they somehow leverage their own investment? Of course, in case there is consent with the majority holder, they could borrow OpCo debt. But if it is not possible to juice the target up with debt, could they somehow leverage their equity cheque? If yes, how? Are there investors for those type of investments?
Thanks for your insights / ideas!
There are good reasons why you don’t put on leverage in Growth Equity.
But generally there are 3 ways you could leverage:
1) At the OpCo level - just like in LBOs, the Portfolio company takes the risk. 2) At the BidCo level - never seen it but could be done although it’s flat out stupid for tax reasons, you would borrow to inject that money in equity, and pay your interest with post tax dividends - just simply stupid as you loose the tax shield from debt. 3) At the fund level - check out what softbank was trying to do with their vision fund 2. Here the fund takes the risk.
Many thanks, that's clear and makes perfect sense.
So is it conceivable (or does it happen in real life) that a sponsor like General Atlantic acquires a 25% stake but agrees with the founders / other shareholders to raise debt in order to leverage the investment?
In mose cases founders have no incentive to raise equity if they can raise debt. This is basic finance theory (pecking order). If they raise equity they dilute their ownership, why would they do that if they can borrow from a bank?
Yet in Growth Equity, most firms do not generate enough cash to pay for interests, and the risk is simply too high for traditional banks to lend them money.
You can pretty much only put leverage on SaaS companies with the likes of SVB for some PE/VC investors. There is a good post by APAE on it.
Not really true. Loads of lenders with SaaS appetite now. I talked to an RBC guy doing it a year or so back. They will lend to cash flow negative companies too.
On point 2, certain jurisdictions employ the concept of tax groups, which calculate tax across a group of affiliated / owned companies I.e. Some interest at holdcos are effectively tax deductible - of course it applies on a case by case basis, but I wouldn't apply a blanket assumption that holdco debt is inefficient
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