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.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.