Raise funds through loan?
Is it common for PE funds to raise some of their capital through loan? Why would they want to do it since they have to pay interest?
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Ever heard of a leveraged buy out?
When you say, "raise capital", do you mean from LPs or for a deal? Capital is already committed by LPs so it's really just a call when you close on a transaction.
there are SBIC equity funds i believe that take a loan from the government. for every $1 of equity they raise, they can leverage $2 from uncle sam. they have to pay a preferred return i think 8% for drawing on this money.
step 1: raise some capital from your contacts: 10MM
step 2: go to bank using 10MM as collateral, raise add'l 90MM
step 3: buy a company for 100MM
step 4: company gets 90MM debt on balance sheet and uses interest as tax shield, raising EV
step 5 company pays out 1 time dividend to shareholders
step 6 $$$$
This is a joke right. 9x leverage. Please.
Think you have all missed the point of the question.
As part of the GP commitment, the senior partners may borrow money, using the management company (and therefore future management and performance fees) as collateral in order to increase their commitment to the Fund. This is particularly common for a new Fund where the main players may not have several million of their own capital to invest in the fund.
At the company level, for a leveraged buyout the company will take debt onto their balance sheet of the investee company to finance the deal (alongside an equity contribution from LPs).
At the fund level there are organisations, such as OPIC, which will provide loans (as an LP) and will be paid a prefered return or a portion of the carry - this is more common in EM and Frontier Markets.
I think the good doctor meant to ask if the PE funds borrow capital at the fund level, rather than the portfolio company level.
The answer is rarely. This is much more common with mezzanine and debt funds, since there are more predictable cash flows from their investments to service the loan plus a lower expected loss if the investment turns sour.
The reasons they would want to are pretty simple-1) it's hard to raise money (they may have wanted $500mm of capital and could only raise $350 of equity), and 2) They plan to earn a higher rate of return on their investments than they have to pay on the loan, and the excess goes to benefit the equity investors.
There are a few main downsides to this: 1) Unlike the debt at the portfolio company level (ie what Gamenumbers wrote out), debt at the fund level usually has recourse to ALL of the investments made by the fund, as opposed to just the assets of the single company.
2) The cash flows from private equity investing are difficult to predict and very "chunky," which isn't compatible with owing interest on a regular schedule
samoanboy & Kenny answered my question. Yes, I meant at the fund level. I'm (a noob) working on a complicated deal and I just want to get things straightened out. Thanks all
From the general sound of it, you probably need to take an extremely basic intro finance course at your local community college first
I can tell you that this forum by far has the most rudest youngsters. College doesn't teach all the basics that you need. You should go flip through your intro finance books, tell me whether you can find information about lending at the fund level. Besides, my question isn't one that's frequently asked. Also, why community college? Does it make you sound superior than others? I don't think so. Go use this kind of attitude in real life and see how your career will progress in long run.
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