Thursday, February 13, 2014

Acquisition Finance: Some background

In over 160 posts, we've explored many ideas, concepts and trends in acquisition finance.  Today I just want to step back and simply talk about the nature of acquisition finance.  Some (or most) of this will be familiar to our readers, but it will nevertheless serve as a context for some of the other discussions.

Acquisition finance is the process of optimizing the capital structure after acquisition, recapitalization, buyouts, MBOs, LBOs corporate restructuring, dividend recapitalization, corporate to corporate deals or some other form of debt refinancing.  Typically there is some change in the ownership structure (if only because the capital structure has shifted) and also typically a high amount of leverage is used.  

Acquisition activity is cyclical in large part because the demand for acquisition finance and the products offered by the market vary over time.  Acquisition finance involves the potential for increased returns, but obviously increased risk.  (There are reasons that we use the term leverage or as the British call it gearing.  See the related posts on High Leverage Deals, Capital Structure and Common Sense and Six Disadvantages of Highly Levered Firms.)  At the same time, acquisition finance provides interesting and potentially profitable opportunities for advisers and lenders.

Typical participants providing capital and advice in acquisition finance include: investment banks, hedge funds, other institutional investors, private equity and financial sponsors.  The products offered in these markets include leveraged finance, high yield bonds, mezzanine debt, revolving credit and other innovative capital structures.  (We'll have much more detail to offer on these participants and products in future posts.   )

In a previous post we noted five ways that acquisition finance creates value including:
1.    Improving incentives
2.    Improving efficiency
3.    Improving governance
4.    Reducing regulatory requirements
5.    Creating tax shields

For more detail, see Five Ways.  In subsequent posts, we'll talk about the KKR model and other approaches to acquisition finance.

All the best,


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