Private equity (PE) buyouts are complicated financial maneuvers which are often characterised by complexity. By using staged acquisition structures and strategic vehicles, PE investors can unlock value while protecting their investments. This article explores the nuances of this framework, from the role of acquisition vehicles to legal intricacies and the rise of offshore registrations. It is the primary a part of a three-part series.
When PE investors acquire firms as a part of a buyout, they sometimes use newly formed acquisition vehicles as a substitute of acquiring the operating firms directly. These vehicles – also called holding firms or special purpose vehicles (SPVs) – are created for the aim of the buyout and weren’t traded before the transaction was accomplished.
The variety of buyout vehicles created may vary and will depend on the complexity of the structure of the buyout and the jurisdictions involved. Figure 1 shows what a typical three-stage acquisition structure might seem like.
Figure 1: Tiered acquisition structure
In this instance, Topco, Midco and Bidco are vehicles created to facilitate the takeover of the operating company. A PE fund fairly often invests along with the management team of the goal company within the newly created Topco acquisition vehicle. This vehicle loans the cash to the midco vehicle, which takes on a specific amount of debt – typically shareholder debt from the PE fund or subordinated debt from an external provider – and loans it, together with the cash from the topco vehicle, to the bidco vehicle. Finally, the Bidco vehicle takes on a specific amount of external senior debt and uses your entire amount of cash to purchase out all debtors and shareholders of the operating company.[1]
Because this tiered structure allows the senior lender to lend to the Bidco vehicle fairly than the Topco vehicle, the senior lender has direct rights against the entity that owns the operating company and due to this fact the goal assets. This structure ensures that the senior lender’s debt will not be structurally subordinated to junior debtors and shareholders. It grants the senior lender a priority claim on the underlying assets of the goal company. External senior lenders in acquisitions, reminiscent of: B. Banks will often prefer this structural subordination.
The number of various securities issued to finance the transaction and the complexity of the buyout are essential aspects in forming a buyout structure. For example, in buy-and-build deals, where PE investors acquire a platform company after which attach other targets to the platform, these acquisition structures can turn out to be more complex.
Differences in jurisdictions also play a vital role in determining the transaction structure. For example, within the United States, Chapter 11 bankruptcy laws provide strong protections for subordinated lenders, so intercreditor agreements and contractual provisions could also be sufficient. The strong protection also means there’s less must create staged acquisition vehicles, as will be the case within the UK or European jurisdictions.
In fact, in a US buyout structure there may only be two vehicles: one for shareholders and one for all debtors. All debt instruments used to finance the transaction might be loaned to a single company, subject to contractual provisions and agreements between creditors ensuring the required structural subordination, much like what happens in UK and European buyouts through the layering of various acquisition vehicles. Nevertheless, more complex US buyouts and multi-jurisdictional transactions may require more complex structures.
It can be price understanding the registration of acquisition vehicles in offshore jurisdictions – a practice popular within the UK lately, primarily designed to avoid withholding taxes.[2] Many PE investors acquiring UK firms – whether based within the UK, the United States or elsewhere – have arrange buyout vehicles registered in offshore jurisdictions. Popular offshore jurisdictions include the Channel Islands, Luxembourg and the Cayman Islands. Aside from tax reasons, registering these firms offshore also can offer PE acquirers greater flexibility in receiving dividends from their portfolio firms. For example, distributions might be made under the laws of Jersey or Guernsey (Channel Islands) without the necessity to have any distributable profits.
In a current one Research workI document a big increase in the usage of offshore vehicles in buyout transactions within the UK. In 2000, only 5% of acquisitions involved an offshore holding company, in comparison with greater than 25% of transactions in 2022 (see Figure 2). This appears to be particularly common in larger buyout transactions and in buyouts from PE firms based abroad. Considering that the financial accounts of the parent holding company are usually not publicly accessible when registered offshore (unlike when the organization is registered within the UK), this highlights a big decline within the transparency of PE takeovers within the UK during the last twenty years .
Figure 2.
Key Takeaways:
- Acquisition vehicles as essential tools: Private equity buyouts are sometimes based on staged acquisition structures, with vehicles reminiscent of Topco, Midco and Bidco playing a vital role in managing investments and debt.
- Advantages of structural subordination: The multi-layered structure ensures that senior lenders maintain priority over subordinated lenders and shareholders and protect their claims against the assets of the operating company.
- Differences in Jurisdiction Matter: Differences in laws, reminiscent of Chapter 11 bankruptcy protection within the United States, influence the complexity of acquisition structures. Stricter bankruptcy laws could reduce the necessity for multiple vehicles.
- Offshore flexibility: Registering acquisition vehicles in offshore jurisdictions reminiscent of the Channel Islands or Luxembourg offers tax benefits and operational flexibility, particularly in terms of dividend distributions. This has turn out to be an increasingly popular practice within the UK lately.
- Complexity grows with strategy: Buy-and-build deals and multi-jurisdictional transactions increase complexity and make structuring critical to effective management and risk mitigation.
When stakeholders understand these elements, they’ll navigate the complicated world of personal equity acquisitions with confidence and precision.
In my next post I’ll take a look at consolidating PE firm portfolio accounts.
[1] These acquisition vehicles might be called anything. Topco, Midco and Bidco are traditionally common within the UK and are used here for illustrative purposes.
[2] This doesn’t apply to domestic US transactions.
