Amid a Bleak Credit Environment, Flexible Techniques Aid PE Buyers

Abstract

This article explores how private equity firms, facing an era of diminished credit and the ascendant influence of strategic buyers, are departing from the highly leveraged, all-cash buyout model that prevailed during the 2004–2007 boom period in order to complete deals. Making use of flexible forms of deal consideration, financial acquirers appear to be increasingly incorporating earnouts and seller financing into the considerations they offer targets to boost the “headline value” of their bids and reduce the amount of the purchase price required to be financed by third parties. In addition, private equity buyers are, with mounting frequency, employing a broad range of flexible investment strategies, which are also designed to lessen the need for up-front third-party acquisition financing. These strategies include requesting that sellers “roll over” significant stakes in target companies, the purchase of minority equity positions in target companies, and making all-equity investments.

TOPICS: Private equity, portfolio construction, performance measurement