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.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.