March 31, 2023
PE Sponsors Turn to Creative Financing Structures
In this Private Equity – 2023 Outlook, Wachtell reviews the key themes that drove deal activity in 2022 and expectations for 2023. On the financing side, the article describes some creative transaction structures that sponsors have been employing amid tumultuous credit markets. Here’s an excerpt:
– Buy now, borrow later. Some sponsors followed a “buy now, borrow later” path—up to and including all-equity deals, such as KKR’s buyout of April Group—writing large equity checks and planning to increase leverage when markets improve.
– You can take it with you… Also en vogue were deal structures that allow a target’s existing debt to stay in place post-transaction—for instance BDT Capital’s purchase of Weber. This approach, while “debt-efficient,” can limit buyout opportunities to more modest transactions, such as capping the new investment below 50%, and otherwise moderating consent and board rights to avoid tripping change-of-control provisions. Such was the case, for instance, in Kohlberg’s “secondary” transaction to buy a 50% stake of USIC from Partners Group.
– Seller notes. In certain situations, e.g., where the seller is a large strategic shedding noncore assets, buyers looked to “seller notes” and other forms of seller-provided financing to close the funding gap. For instance, Searchlight Capital Partners’ and Rêv Worldwide’s acquisition of Netspend from Global Payments was funded, in part, by Global Payments-provided financing.
The article also addresses recent trends in liability management transactions and the rise of direct lending.
– Meredith Ervine