What does a PE firm do in a Management Buyout?

I know they provide funding for managements equity stake in the company but does the PE firm raise debt and then use the managements equity stake to buyout the company? Does the PE firm provide equity financing? How are they compensated? Who decides exit strategy since management has control and not the PE firm?

 

I think you're misunderstanding a bit. An MBO is really just an LBO where management is structured to stay on and they contribute a lot of their personal wealth into the deal (but nowhere near what the PE firm is contributing in most cases). So PE still has control because they're contributing the most (or even if that's not true, they'll still negotiate to have control rights via the shareholder agreement).

 
Best Response
CHItizen:

I think you're misunderstanding a bit. An MBO is really just an LBO where management is structured to stay on and they contribute a lot of their personal wealth into the deal (but nowhere near what the PE firm is contributing in most cases). So PE still has control because they're contributing the most (or even if that's not true, they'll still negotiate to have control rights via the shareholder agreement).

This. An MBO, unless the management has tons of money or holds a lot of stock, is basically an LBO where management kicks in dollars and stays on board but the PE fund funds most of the equity and retains control (for the most part, obviously there are exceptions to everything). And they will typically leverage the deal with external debt.

A recap is (usually) totally different unless the owners of the business are selling off a majority of equity to an equity investor. You can do a leveraged recap and take cash off the table and into the owner's pocket but it's tough to take a significant % if you're trying for all debt if it's a private company. Lenders typically don't want an non-sponsor owner(s) to take a significant amount of money off the table if it's funded only through debt and will more likely want equity invested alongside.

 

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