The Secret to Successful Leveraged Buyouts

Posted on: March 25th, 2023

leveraged-buyouts

To build a portfolio of leveraged buyout assets, private equity firms must have highly efficient and integrated process flows. These process flows include origination, review, valuation, negotiation, and deal management. Some firms use a scaled up, mass production operating model predicated on volume. Others use a slimmed down, specialty boutique model focused on investment selectivity. Many firms leverage elements of both to arrive at an optimal operating model.

While the front end of this process is critical for booking assets, it is the back end of the model, the operational expertise contributed to the asset that determines the overall success of the leveraged buyout. Operational expertise is the know-how the firm imparts to the company to elevate its performance. Most firms have extremely talented operators on their payroll who can bring unique operational insight to investment decisions. Often these views, while high level and value added, fail to get translated into the new operational playbook of the management team. The private equity firm may have a great idea to transform the company, but the idea does not get fully implemented due to a gap between investing and change implementation.

The secret to successful leveraged buyouts is to ensure that operational insight is fully captured at the operational level. Giving visionary directives to existing management may or may not get the job done. It is safer to have firm level management resources directed operationally at the company level. When the front-end investment insight is fully documented and mapped operationally in an effective manner, the leveraged buyout is best positioned for long term success. Like any change management exercise, there will be bumps along the way. Course correction will occur and the progress will likely not be a straight line upward. But over long periods of time, the private equity firms with the greatest leverage buyout returns are those who prioritize the distillation of operational insight at the grass roots, company level.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.