post LBO ? - fresh capital for growth?
After a PE fund buys a company via LBO, is it normal for the PE fund to inject fresh capital for growth into the company or perhaps for a bigger cash reserve for higher interest payments?
would this done by issuing more shares in the company?
any info is appreciated.
That's not what I've seen. To start with, conceptually it wouldn't make sense. Moreover, depending on the amount, it would materially affect the return rates (invested capital would increase = purchase price + capital infusion).
Don't forget that, at least conceptually, an LBO is a financial motivated transaction. In other words, you extract value from it by leveraging the target and then using its internally generated cash flows to pay down debt and sell the company latter on (when you have already built equity).
What they do try to do is increase the operating efficiency of the company - cutting costs, increasing margins, shiftting the corporate strategy, implementing roll-up strategies, etc...
In the golden days of LBO (2 or 3 yrs ago) this was being ignored to a certain extent due to the wide access to debt capital. But now, LBO and the whole private equity industry itself will tend to return to its origins - where you try to extract value through value accretive initiatives (as described above) as opposed to "simply" using loads of debt to "buy low and sell high" type of thing.
well maybe they could take on extra debt to have more cash on hand?
i only ask because i always hear that some PE investments are for "growth" which sounds to me like they are putting up additional capital to maybe open more stores or expand or something where the company couldn't standing alone.
am i making any sense?
If they could take on more debt to have more cash, they would have taken on more to begin with to fund the purchase. An undrawn revolver gives some cushion for operations.
1). The LBO fund takes the maximum amount of debt they can to buy out target and put in the minimum in equity. So, it wouldn't make sense for them to leave a portion of debt to be taken on after the LBO is done, simply because they want to inject the minimum equity as possible. Also, they wouldn't have room for more / extra debt post LBO, since all possible facilities were used to the limit (say 4.5x EBITDA, etc).
2). You are not wrong in your second point. But then you are talking about the traditional private equity activity, as I described previously. You can have 2 situations here:
(a). A PE fund buys a stake in a company in order to retire an existing shareholder (the founder of the company, another PE house exiting the investment, etc); or
(b). A fund inject new equity capital, which increases the company's equity and consequently grants a shareholding to the PE fund (diluting existing holders). This money is then used to finance a company's growth, retire debt, etc. Note that here, the company receives the proceeds that will be used to open up new stores, buy an equipment, pay down debt, etc. In the first example, the company does not even see a piece of that money - it is a transaction on the shareholders level.
A third perspective is that these Small Cap/PE funds are taking minority control rather than doing a "buyout". This is where the capital is purely used for growth / expansion. These are very common in the lower middle market and equity investments are typically as growth capital.
When you use both equity and debt for control, it's purely acquistion finance and you assume the Company can generate enough cashflow to pay down it's debt and fuel its own growth... Those are the most basic / fundemental roots of an LBO... What a buyout fund will most likely do is exhaust the Company's debt capacity at entry therefore not allowing any additional debt capacity till at least 2 years out... Co-investors may inject money into equity, but ppl dont typically like to get in on a good deal half way through...
whats going on now is that companies that have been LBO'd are having issues making interest payments, maintaining covenants, etc.
For certain companies, sponsors are saying thats its only because of a recessionary impact and that the business model is sound. So they inject equity into a company to get it through the down cycle.
Its called an equity cure.
The world has changed. And we must change with it.
MezzKet is right... there is also this 3rd perspective as described...
Good point Cornelius, I have also heard about something similar to that - equity cure.
An equity cure usually is a line item in the convenant agreement that will state whether you can "cure" a covenant miss with an equity infusion. Ex: If you miss your EBITDA covenenant by $50MM; you can put in $50MM in equity to satisfy the covenant.
A good write up on equity cures for those who don't know how they work:
http://www.slaughterandmay.com/media/38929/financing_briefing_-_an_over…
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