Alternative Solutions for Financial Sponsors in a Challenging LBO Market: A Look at Tailored Investment Models

19 September 2023
View Debevoise In Depth
Key Takeaways:
  • Given the current macro-economic environment and obstacles facing traditional leveraged buyouts, financial sponsors are increasingly adopting alternative structures and investment models as a means to deploy capital.
  • One of the common investment strategies emerging is the “partnership model”, where sponsors acquire a non-controlling equity stake while existing owners retain significant equity and business control. A key weapon in the arsenal of financial sponsors looking to implement such bespoke investments is the use of preferred equity instruments. These highly customisable securities offer significant flexibility in their structuring and terms, and can allow parties’ valuation gaps to be bridged more easily.
  • We predict this trend of increasingly varied investment structures and, in particular, the use of preferred equity to effect such structures, will continue in the European market. As the market matures in respect of such structures, sponsors familiar with their characteristics and pitfalls should be best positioned to take advantage. Provided that a particular structure – whether a non-control partnership effected through ordinary equity, preferred equity, or a combination or variation of them – reflects and protects a sponsor’s investment thesis, it may be worth pursuing, even if a departure from the firm’s traditional strategy
  • In this article, we explore some key considerations for the partnership model (including the importance of alignment on investment thesis, governance, reserved matters and the path to exit), as well as certain common characteristics of preferred equity securities and the advantages/disadvantages of such instruments versus ordinary equity or debt.