Hey guys,
Would someone be able to shed some list on vendor/seller notes?
My understanding is that it is when the seller invests in the LBO capital structure, the key advantage being that it may involve a lower-than-market cost of debt since the lender in question used to own the company and is thus more comfortable with the credit etc. (but perhaps not so comfortable/willing that they want to hold on to the equity, hence why they are selling).
Is this broadly correct? Would someone be able to add color on:
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Pricing
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Seniority
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What sort of transactions you see the is on? (e.g. could it be multi-strategy funds who sell their equity stake from their private equity fund but then invest in the cap structure of the next buyer via their credit fund? - I've seen this being done, but usually not in the form of seller notes, just an outsized investment in a syndicated TLB)
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Anything else useful
Thanks!
Quantum and terms vary a lot as this is a deal-specific instrument.
Main advantage: junior to bank debt so little to no impact on debt quantum, while it does reduce equity cheque. When targetting 20%+ IRR, this instrument can boost your returns/offer at same return.
In addition it gives seller some skin in the game.
Pricing varies a lot. Have seen 5-9% where bank debt was L or E+3-ish%
Seen it in family exit to PE with little to no involvement post deal.
Thanks a lot for this!
When you say "so little to no impact on debt quantum", you mean it has not impact on the senior secured debt quantum. Surely it does impact the overall debt quantum? (Sorry if I'm quibbling over symantics..)
In your experience, do these instruments tend to involve cash or PIK interest? I'm guessing it's very case dependent
Could there be an equity kicker? Again probably case dependent, but I'm wondering whether the previous family owner wants to participate in the upside if, for example, the PE shop meaningfully improves the busines. Granted, the PE shop would likely not want to share that upside..
Thanks!
As long as sources of financing are subordianted and non-cash they dont impact more senior tranches is my experience (and why would they). Therefor these instruments are often PIK (or no interest when dealing with stupid sellers:). Haven't seen equity kickers, but I believe in US you are much more creative with these sorts of structures.
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