Sophie Manigart tom VanaCKEr Olivier WitMEur
grOWtH CaPitaL anD BuY-OutS
guiDE FOr BELgiuM
WWW.VEnturE-CaPitaL.BE
The English-language version of this guide was made possible by the kind support of Stibbe to the Belgian Venture Capital & Private Equity Association vzw/asbl.
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G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
FOREWORD
Dear Reader,Private equity is a field that often remains obscure or baffling to society at large. Nevertheless, private equity plays an important role in the development of companies.
Private equity – or venture capital – is funding that our sector makes available to companies in order to provide them with mid to long term support. In Belgium, the sector invests in some 200 projects each year, providing capital and equity to companies with the primary emphasis being on sustainable growth. Last year, the BVA published a guide covering the sector of venture capital, in other words, the financing of very young companies in their initial years, quite often with a significant technological component. This year, we have written a new guide that is focussed on the way that private equity helps mature companies by providing capital for growth and for financing buy-outs. The sector typically works in part-nership with our highly dynamic SME segment as well as even larger companies.
This guide was written by respected academics from the Vlerick Leuven Gent Management School, Ghent University and the Solvay Brussels School, who explain the concepts in clear, simple terms. The purpose of the guide is to demystify private equity for company directors and their advisors. On behalf of the non-profit Belgian Venture Capital & Private Equity Association (the “BVA”), I hope you will find it useful!
Guy Geldhof
Secretary-General of the Belgian Venture Capital & Private Equity Association vzw
For more information on the BVA and its activities, please visit the website www.bva.be.
Koen Dejonckheere
Chairman of the Belgian Venture Capital & Private Equity Association vzw CEO Gimv
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This guide was written by
Dr. Sophie Manigart
,
Dr. Tom Vanacker
and
Dr. Olivier
Witmeur
with the support of the non-profit Belgian Venture Capital & Private Equity
Association.
If you have any questions, please feel free to contact us at www.venture-capital.be
Sophie ManigaRt
Sophie Manigart is a Partner at the Vlerick Leuven Gent Management
School where she holds the Gimv Chair in Private Equity and she is also a
professor at Ghent University. She specialises in corporate finance (angel
financing, venture capital and private equity) and has written numerous
articles and books on the subject. Her additional activities include a position on the
investment committee of the Baekeland Fund II (investment fund for spin-offs of Ghent
University).
tom VanackER
Tom Vanacker works as a postdoctoral researcher for the accountancy
and business finance research group at Ghent University. He received
his PhD in Applied Economics from Ghent University in 2009; during this
period, he also spent a year as a research fellow at the Carlson School of
Management (University of Minnesota). His research is chiefly focussed on
the relationship between the financing and growth of non-publicly traded companies.
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
Olivier WitMEuR
Olivier Witmeur is a professor at the Solvay Brussels School of
Economics and Management (ULB) where he holds the Bernheim Chair
in Entrepreneurship. He is specialised in strategies for the establishment,
growth and financing of emerging companies. He is also chairman of the
Council for Science Policy of the Brussels Capital Region and is on the board of various
companies. Previously, he was an entrepreneur in a strong growth company and
direc-tor of the EEBIC, an incubadirec-tor for innovative companies in Brussels.
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CONTENTS
FOREWORD
p. 1
1. intRODuctiOn
p. 5
2. WHat iS gROWtH,
EXpanSiOn OR DEVELOpMEnt capitaL?
p. 9
3. WHat aRE BuY-OutS?
p. 11
4. tHE inVEStMEnt pROcESS anD
tHE SEaRcH FOR SuitaBLE inVEStORS
p. 15
5. intRODuctiOn tO tHE cHiEF
VaLuatiOn tEcHniQuES
p. 22
6. FinanciaL inStRuMEntS uSED
BY pRiVatE EQuitY
p. 27
7. tHE ROLE OF pRiVatE EQuitY
inVEStORS aFtER tHE inVEStMEnt
p. 36
8. tHE WitHDRaWaL OR EXit
p. 44
9. a FEW EXaMpLES
p. 50
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INTRODUCTION
A tiny minority of all companies are responsible for a disproportionate share of the innovation, job growth and value creation within an economy. One of the most challenging activities for growth-ori-ented entrepreneurs is obtaining sufficient and ap-propriate financing to support their ambitions for growth. Financial resources are after all essential for growth-oriented entrepreneurs in order to be able to invest in tangible assets, intangible assets and working capital. A good knowledge of various financing alternatives is crucial for securing effi-cient financial resources and arriving at a financing mix that meets the needs of both the company and its owners. Insufficient knowledge of or misconcep-tions about certain financing alternatives can lead to a suboptimal financial structure. In turn, this can result in limited prospects for further growth, financial difficulties, tensions between the various financiers or shareholders, and even bankruptcy. The goal of this guide is to provide entrepreneurs and other interested parties (such as accountants, bankers, consultants, politicians or government officials) with a better insight into the role that private equity can play as a financing alternative
for supporting the growth of companies or the transfer of their ownership. Private equity financ-ing is a medium-term (quasi) equity financfinanc-ing for non-publicly listed companies with high growth potential. The role of private equity investors is not restricted to providing financing, they also function as an active partner for the entrepreneur. They can provide strategic or operational advice, or actively mobilise their network on behalf of the companies in their portfolio. However, many myths persist about private equity. Private equity financiers are idealised by some as the ultimate saviours of our companies, whilst by others they are decried as ruthless predators only out for quick profits. That is why the aim of this guide is to present a realistic picture of the functioning of private equity inves-tors and to dispel a number of popular misconcep-tions.
Figure 1.1. gives an overview of the various forms of private equity in function of the developmental phases of a company. Private equity not only entails equity financing for start-ups, but also financing for the subsequent phases as a company develops.
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Figure 1.1. Developmental phases of the company and the role of various forms of private equity financing
Source: Smith & Smith (2000) “Entrepreneurial Finance”.
Sales
Profit/loss
Cash flow
Product
development Initial commercial activities Market penetration Product maturity Seed phase Start up and initial
growth phase Rapid growth phase Maturity phase
Venture capital Growth capital Buy-outs
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
In a previous guide “Venture capital guide for Belgium” the focus was on venture capital, which is only one aspect of private equity. The goal of the first guide was to offer beginning and young entrepreneurs greater insight into the functioning of venture capital investors. This guide is focused on the role and use of private equity in more ma-ture companies. There are times when healthy, established companies can also need an injection of external equity, for example when they wish to de-velop new products and bring them to the market, or when they want to tap into new (international)
markets or to grow by means of takeovers. Private equity financing can also facilitate the takeover of an established company by the existing management team or by a new one - known as a buy-out – and finally, the buy-out of a (minority) shareholder, for example one branch of a family, can also be realised with the help of a private equity investor.
Are there alternatives aside from private equity? Of course there are. Three of the commonly used alternatives for financing growth are self financing, obtaining financing from banks, or collaborating with an industrial partner.
CAN PRIVATE EQUITY HELP YOU TO REALISE YOUR AMBITIONS?
• Are you prepared to allow third parties to share in the decision-making on the strategy for your company?
• Do you have the ambition to grow and create value with your company?
• Is your team willing to follow you in your plans? Does the management team have sufficient experience?
• Do you have a well thought out business plan?
• Is there a realistic exit option for the financial shareholders within a few years? Do you wish to leave your company yourself?
If you have answered yes to the majority of the above questions, then private equity would appear to be an appropriate financing method for realising your ambitions.
• Self financing
An entrepreneur may choose to use the resources generated internally to finance the growth of the company in a way that is fast and straightforward. This is probably the simplest form of financing. An entrepreneur can also invest personal resources
or call upon family or friends. One disadvantage of limiting equity growth to the profit reserves is the limiting effect this can have on the growth of the company. After all, growth also automatically means that the company will need to invest in tan-gible assets and in working capital. If the profit
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reserves fall short of the required investments, the company runs the risk of growing faster than its financial capacities allow, which can result in an imbalanced financial structure and ultimately, fi-nancial difficulties. The advantage of private equity investors is that larger amounts can be made available, which allows a greater increase in equity, so that more investment and faster growth can be realised.
• Bank financing
Bank financing is probably the most frequently used form of financing for companies, which are not listed on the stock exchange. However, bankers limit their loans to the company’s maximum borrowing capac-ity, which is determined on the basis of the cash flow the company generates in its day-to-day activities. What’s more, bankers will generally require guar-antees: either business guarantees based on the company’s property, or personal guarantees. For companies with limited borrowing capacity, which possess little or unsuitable property (such as
intan-gible assets) or for entrepreneurs who have already made significant (financial) commitments with their company, it can be difficult to obtain additional bank-ing financbank-ing for new growth plans. A private equity investor, however, provides share capital. This leaves the debt bearing capacity of the company intact, and no guarantees are required.
• Industrial partners
There are various ways in which an industrial partner can help to finance growth. A company can establish joint operating contracts with an industrial partner, for example for research or distribution, whereby its own investment remains small. But an industrial partner can also participate in the capital of another company, if this potentially represents a strategic added value for it. By becoming a shareholder, an industrial partner can, for example, be exposed to new areas of research or markets and market trends that it is not actively exploring itself. In this type of transaction, the strategic added value is often more important than the hoped-for financial returns.
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WHat iS gROWtH, EXpanSiOn OR
DEVELOpMEnt capitaL?
An established company can turn to private equity in order to support its growth. Typically, a company will first use its internal resources to finance investments. If it has more projects than it has cash, then the company seeks banking or other forms of credit. However if its debt bearing capacity has been expended, whilst attractive in-vestment opportunities remain, then an injection into the equity is desirable. The company needs to carry out a capital increase and issue new shares. This capital can come from various parties, includ-ing the existinclud-ing shareholders, industrial partners, or the capital markets. Private equity financiers are another alternative.
Typically, private equity financiers look for established companies that have a proven track record. This may include companies with a strong management team, a strong market position and good, stable cash flows from their operations. Growth opportunities, either through internal growth, or through takeovers, are essential. These opportunities may be situated in innova-tive sectors, but they can also be found in quite traditional sectors. A strategy for growth through takeovers can be highly attractive, for example, in a mature but fragmented sector, where a com-pany that is supported by private equity is able to buy up multiple smaller competitors thus expand-ing its scale. Thanks to this expansion, economies of scale can be realised, allowing the company to then outperform any remaining competitors. This is referred to as a “buy-and-build” strategy. Once a company has established a strong local posi-tion in this way, further growth can be realised
through international expansion, which may be focused on new growth markets.
In addition to a capital increase, the introduction of private equity financiers may also be driven by the desire on the part of several shareholders to sell their shares. In this way, private equity can of-fer a solution for the transof-fer of family businesses, whereby some of the shareholders wish to remain active but others prefer to sell their shares. If the value of the sellers’ shares is more than the remaining shareholders are capable of paying, then a private equity financier can purchase (a part of) the available shares. In this case, there is no capital increase and the company’s resources are not increased. Generally, private equity inves-tors are only interested in this type of operation if the company offers considerable prospects for growth. Often, in these companies, there is suf-ficient debt capacity (specifically a relatively low debt position compared to the working cash flows generated by the company) to finance the future investments through debt. Of course the private equity player itself can make additional growth capital available to the company.
Finally, private equity can also offer a solution for companies in trouble. Typically, these companies have fewer resources than they are required to repay to their creditors. These companies will first seek internal solutions to their problems, by restructuring their operations or selling assets. They will also attempt to take out new loans to finance the repayment of their old debt, or reschedule their debts. However, this strategy is
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not self-evident: few creditors will be prepared to finance a company in difficulty. In such cases, private equity can again offer the solution. The company will carry out a capital increase, whereby private equity financiers subscribe to the new shares. Obviously, the capital increase will take place at a lower price.
If the reorganisation is successful and the company faces renewed prospects for the future, then the private equity financier stands to realise a tidy profit.
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WHat aRE BuY-OutS? DEFinitiOn,
tYpES anD FORMS OF BuY-OutS
3.1. Definition
In a buy-out transaction, a manager or management team takes over a company and thereby acquires a significant interest in the company’s capital. The company being taken over may be a family busi-ness, which no one within the family is prepared to carry on, or a publicly listed company (what is known as a “public-to-private” transaction), but may also be a division of a larger company. The simplest and most common way of financing a buy-out is to supplement the manager’s own resources with bank credit. Primarily smaller transactions are financed in this way, without the term buy-out being used. For larger transactions, the amount of financing that can be put together between the management and banks will be in-sufficient to pay the price of the takeover. That is why most medium-sized to large transactions are financed with a combination of own resources, credit, and private equity. An aspect that is specific to the Belgian context is the absence of very large private equity funds. The consequence of this is that the largest buy-out deals are generally not financed by Belgian funds but rather by foreign funds.
Figure 3.1 illustrates how a buy-out is typically structured. A new company is created especially for the transaction (Newco); this company buys the target company. The target company’s shares may be purchased, or all (or a selection of) its assets. In order to finance the purchase, Newco raises
various forms of financing, made up of share capi-tal (ordinary share capicapi-tal, preferred share capicapi-tal, etc.) and debt capital (traditional debt, mezzanine debt, etc.). Share financing is typically contributed by the management and private equity investors, but the seller may also take a partial interest. Debt financing is contributed by financial institutions such as traditional banks, but also by mezzanine financiers. For other forms of debt financing (such as, for example, high-yield bonds) the public capital markets, or the seller (‘vendor loans’) can be en-gaged.
In Figure 3.1, it is assumed that Newco purchases the target company’s shares (‘shares transaction’). This involves taking over both the assets and liabili-ties. Once the transaction is completed, Newco can merge with the target company or continue to exist as an independent company (holding) that owns the shares in the target company. The decision to merge or remain independent will be determined by legal, financial and fiscal aspects. Sometimes only the assets or a part of the assets of the target company are taken over (‘asset deal’). In this case, Newco becomes the new direct owner of the as-sets.
3.2. Types of buy-outs
There are different kinds of buy-outs. There are, however, no clear divisions and different names are often used interchangeably. Buy-outs are catego-rised according to the main buyers and the financial structure of the transaction.
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• Management Buy-Out
A Management Buy-Out (MBO) is a buy-out in which the present management of the company to be taken over is the driving force in the purchase. The management plays a crucial role in the nego-tiations with the seller(s), potentially together with external investors, and typically acquires a signifi-cant percentage of the shares in Newco. Depending on the financial contribution of the management and the value of the target company, they will have either a minority or majority interest in the capital. The existing management team is often best placed to further develop the company since they possess
the business specific knowledge. The success of the MBO therefore largely depends on the input of the management.
• Management Buy-In
With a Management Buy-In (MBI) an external man-agement team acquires control of the company to be taken over after the buy-out. The – generally small – management team that takes the lead in a management buy-in typically consists of individu-als who have had a successful career in the target company’s industry. The management team does not generally take the initiative for the transaction
Figure 3.1. The typical structure of a buy-out transaction SOURCES OF DEBT CAPITAL
• Banks
• Institutional investors • Seller
• Public capital markets
DEBT
• Traditional debt • Mezzanine debt • High-yield bonds
SOURCES OF SHARE CAPITAL • Management
• Private equity investors • Seller
EQUITY
• Ordinary share capital • Preferred share capital • Shareholder loans
NEWCO
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itself, but it is put together by private equity inves-tors after negotiation with the sellers(s). It can also occur that managers from outside the company purchase the target company together with (a part of) the acting managers; this becomes what is known as a buy-in management buy-out (BIMBO). The transaction structure of a management buy-in is equivalent to that of a management buy-out. Management buy-ins are riskier than management buy-outs, however, because the management team taking over does not yet have any experience in the target company. The advantage of a management buy-out is that the acting management team in the target company has a more detailed knowledge of the company. With a management buy-in, the ex-ternal managers typically don’t have access to the same information before the transaction, which means that a number of problems may arise in the company that has been taken over only after the fact. The advantage of a management buy-in is that a new vision of the activities is brought in, enabling new strategies to be explored.
• Leveraged Buy-Out
A Leveraged Buy-Out (LBO) is a buy-out that is financed with a large debt package. Most buy-out transactions are partially financed through debt, but proportionately, in a leveraged buy-out, a greater amount of debt is used. In transactions involving a lot of debt, private equity investors will typically play an important role in negotiations with both the seller(s) and the debt financiers in order to devise an optimal financial structure. Both the private investors and the creditors will ensure that they have control mechanisms in place that allow
them to intervene if the management does not per-form as expected. Creditors will not only demand guarantees but will also look at the size and the sta-bility of the cash flows of the company to be taken over, since these are necessary in order to pay the interest and principal repayments. In order to limit the risk for the creditors, restrictive clauses form an integral part of the borrowing contracts.
• Other types of buy-outs
A Management-Employee Buy-Out (MEBO) is a buy-out transaction in which, along with the man-agement, a significant portion of the employees becomes shareholder as well. The employees will typically hold a minority interest. In an Investor-led Buy-Out (IBO) an institutional or private equity in-vestor will assume leadership over the transaction and take over the target company directly from the seller(s). The investor can either retain the existing management within the target company or opt to engage a new management team.
3.3. Origin of buy-outs
Buy-outs may originate in different situations. An overview of the major sources is presented below. • Succession within family businesses
Management buy-outs often form a solution for suc-cession issues in family businesses when the owners or founders decide to leave the company. If no one within the family has the necessary capacities or is prepared to take charge of the company, the family may choose to sell the company to the management. • Divestment of a division
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wish to divest themselves of an activity. There are different reasons why companies or holdings may decide to sell certain components. When companies revise their strategy, certain parts of the company may no longer fit within the picture. Companies may also have problems with their operations, leading to cash flows that are no longer sufficient to meet their debt obligations. In this way they are forced to sell off certain activities or components in order to improve their cash position. Furthermore, competition legisla-tion may require companies to sell certain parts. Buy-outs as a consequence of divestment are often driven by the entrepreneurial spirit of the manage-ment. Managers in a large company often see valua-ble opportunities within their unit, but are sometimes unable to pursue them due to a relatively inflexible structure or the non-strategic nature of their unit. In that case, a buy-out can offer the potential to these managers to develop these opportunities.
• “Public-to-private” transaction
In a public-to-private transaction, the management or a private equity investor makes a bid for the shares of a publicly listed company in order to then take the company off the stock market. Given that the trans-action value is typically high, these transtrans-actions are
often characterised by a great deal of debt financing. Since the management itself acquires a significant percentage of the shares, the private equity investors retain oversight of the management and the free cash flows must be used to service the high inter-est payments and principal repayments, after the transaction there will be a strong discipline to work highly efficiently and in such a way as to create value. Public-to-private transactions can also offer a solu-tion for small, publicly listed companies in which the shares are often non-liquid, and which are therefore not very attractive to institutional investors. This often makes it difficult for these companies to raise additional financing to support further growth. The shares of these companies are also often underval-ued, which offers the opportunity to purchase the shares at a good price.
• The withdrawal of a different financial investor (‘Secondary’)
A secondary buy-out takes place if a buy-out company performs a second buy-out sometime later in order to offer a way for existing investors to withdraw. The ex-isting investors thus have the opportunity to sell their shares to new financial investors. Secondary buy-outs are becoming more frequent and currently form an important exit mechanism for the initial investors.
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
tHE inVEStMEnt pROcESS anD tHE
SEaRcH FOR SuitaBLE inVEStORS
How should an entrepreneur proceed to attract pri-vate equity? The process is similar for both growth financing and a buy-out transaction. In the first place, a business plan needs to be drawn up. A well-designed business plan is a conditio sine qua non for convincing investors. Then, it is important to identify a suitable investor. Later on in this chapter, a short overview will be given of the different steps in the
negotiations with private equity investors once you have gained their attention.
We shall also briefly discuss the role of other par-ties in addition to the managers and private equity investors in the financing process. Table 4.1. shows a summary of the various steps in the investment process from drawing up the business plan to the ultimate investment.
4
Phase Entrepreneur Entrepreneur and PE investors PE investors Search for investors / evaluation business plan
- Drawing up business plan - Appointing advisers - Contacting Investors
- Reviewing business plan
Initial negotiations - Providing additional information
- Discussing business plan - Making contact with banks - Developing relationship - Drawing up draft term
sheet
- Thorough analysis of the business plan
- Valuation
- Financial structure
Due diligence - appointing accountants
and advisors
- Starting up external due diligence Final
negotiation
- Providing all relevant information
- Negotiating with banks - Negotiating final term sheet and shareholder
agreement - Drawing up necessary documents Closing / investment - completing the administrative formalities
Source: BVCA/PWC (2003) “A guide to private equity”.
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“BEAUTY CONTESTS”
Despite the fact that private equity investors are highly selective, it often happens that private equity funds are forced to compete with one another in order to invest in the best buy-out companies and the best management teams. Sometimes intermediaries organise “beauty contests”, in which a limi-ted number of private equity investors are invilimi-ted to make a bid based on the business plan. Detailed due diligence and negotiations are then only pursued with the private equity investor that has made the best bid. This often affords entrepreneurs greater choice and more negotiation power to find the most suitable financiers in light of their growth ambitions. However, “Beauty contests” are never used when it is a matter of investing in young companies by venture capital financiers, because the specific sectoral knowledge of the investor and a thorough knowledge of the project are crucial for investing in this type of company.
4.1. Business plan
Attracting private equity financing starts with cre-ating a sound business plan. A business plan is an analytical instrument that systematically charts the different variables that determine the success of the company. Essential parts include the entrepreneur’s team and their experience, the opportunity, the market, the competition, etc. The business plan is a crucial document for a number of reasons1.
• It forces the management to establish concrete goals. It is a strategic and operational aid that shows how everything will be organised by break-ing the project down into a number of clearly identified steps (known as milestones).
• It is a financial tool that contains the prognosis for the financial performance and the need for liquidity. This is also the point of departure for the valuation of the company. A financial plan is therefore only a part of the business plan; it is the financial translation of the intended strategy and its operational implementation.
• It forms a communication tool for convincing potential financiers to invest the money that the company will need. That is why the business plan is a central document in negotiating with investors. Each year, Belgian private equity investors receive hundreds of business plans, whilst they end up financing just a few of them. So attracting the attention of an investor is certainly no easy matter. An executive summary is therefore an essential part of any business plan. The entrepre-neur must be able to express in the space of two pages, in specific and non-technical terms, what the company does, its objectives and how these objectives will be realistically met. Although the executive summary is placed at the front of the business plan, it will be the last part that is written since it forms a summary of the entire business plan. The appeal of the executive summary will often determine whether or not the investor will be inspired to read the rest of the business plan in detail.
1 Although the business plan is an essential document, we shall not go into detail here about how to draw up a business plan. At
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4.2. Identifying suitable investors
Private equity investors are highly selective and in-vest in just a fraction of the companies that request financing. Selecting the most promising companies and best management teams is therefore an es-sential skill for successful private equity investors. Investment opportunities that do not fit within the investment strategies of private equity investors are typically ruled out immediately. Private equity investors tend to focus on specific phases in the de-velopment of a company, specific sectors, or spe-cific geographical locations. Moreover, they also establish a minimum and maximum investment amount. A targeted search for financiers whose investment criteria match the characteristics of the company is therefore important.
• Phase in a company’s development cycle Some private equity financiers apply a broad investment strategy and invest in all phases of de-velopment. Others focus exclusively on companies in a certain developmental phase, such a young companies (venture capital), established compa-nies or buy-outs.
• Sector
Suppliers of growth capital or buy-out financing are not generally likely to exclude many sectors. Nevertheless, they may have a preference for companies within certain sectors. In that case, (a part of) the investment company’s management team consists of sector specialists. In fact, in addi-tion to financing, private equity investors provide other services such as strategic and operational
advice and access to their networks. The added value that investors can contribute will typically be greater when the investment managers have built up sector specific experience. There is no question that it is hardly productive for an entrepreneur to appeal to private equity financiers who do not wish to invest in the company’s sector. An investor with limited sectoral experience may however later on invite investors with more relevant experience and networks to form an investment syndicate and invest in the company jointly.
• Geographical location
Providers of risk capital typically have a geographi-cal preference ranging from regional investors, na-tional investors, investors with a European focus to worldwide investors. For certain companies, it can be important to seek private equity investors from beyond the national borders. In this sense, compa-nies who are looking to attract growth financing to support their internationalisation strategy may find it advantageous to attract strong foreign inves-tors. They may, for example, be able to contribute relevant information about the intended interna-tional market, or offer access to their networks or give the company greater legitimacy towards employees, clients or suppliers abroad. On the other hand, it is more difficult for foreign investors to be closely involved in the development of the company, as the greater distance inevitably leads to communication challenges.
Bringing together a syndicate that is made up of both local and foreign investors can be a way to combine the best of both worlds. Moreover, a strong national investor is often a conditio sine qua
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non for attracting a strong international investor.
The local investor then functions as a bridgehead for the international investor.
• Investment amount
Private equity investors carry out a thorough screening before investing. Also after the invest-ment, they remain closely involved, since they want to maintain control over the policy and wish to make their knowledge and networks actively avail-able. It is clear that all of this involves fixed costs (Costs that do not vary depending on the amount of financing required), which can only be recuperated if the invested amount and the potential returns are large enough. That is why risk capital providers are only interested in investing larger amounts. It is very difficult to find a private equity investor for a project requiring capital of less than several million euros unless the potential returns are exceptionally high. For smaller amounts, entrepreneurs should call upon other financiers.
Private equity investors will also define a maximum investment amount, as they want to spread the risk for their portfolio. Smaller investors for example, will want to invest a maximum of 10 percent of their investment fund in a single company. Again, it should be pointed out that an investment syndicate bringing together various private equity investors who jointly provide the necessary financing, can form a solution here. After all, this allows them to jointly invest a greater amount in a company. The largest Belgian buy-out deals, however, are often done by foreign private equity investors, since the Belgian investors are too small to finance the larg-est deals. Some foreign private equity invlarg-estors do
however have branch offices in Belgium.
Even if the characteristics of the company match the investment criteria of the private equity inves-tor, it remains a challenge to raise private equity financing. The complete process takes a long time and there are no guarantees for success. Below, we shall discuss the negotiation process between the entrepreneurs and private equity investors after an entrepreneur has attracted the initial interest of an investor.
4.3. Deal structuring
Entrepreneurs often underestimate the time required by negotiations with private equity inves-tors. In its entirety, the process from the initial con-tact up to the final investment takes at least three months, but on average it takes approximately half a year. This, however is an average, and depending on the economic situation, the process can also take much longer. It is therefore important to start searching for private equity financier well ahead of the time when the financing will effectively be needed. Although private equity investors have their own ways of working, they generally follow the steps presented below.
When the business plan has aroused the interest of a private equity investor, the entrepreneur is invited to give a brief presentation of the project. The purpose of this is to explore whether the initial expectations are confirmed, and to get to know the people behind the initiative. If all goes well, a number of follow-up meetings are usually held in which the various aspects of the business plan are
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
reviewed. The investment manager will especially scrutinise the assumptions on which the business plan is based. The financial aspects will also be discussed. An initial evaluation is necessary to esta-blish the percentage of the shares that the investor will be able to claim. Based on these meetings, the investor will indicate whether it is an attractive project, in principle, which is referred to as the viability decision. When this decision is positive, it will result in a nonbinding letter of intent and the thorough due diligence research will begin. Since a due diligence process involves many costs, an investor will request exclusivity from the entrepre-neur. It is up to you to decide whether or not you wish to grant this.
In the due diligence process, the project is thor-oughly investigated, both by the investment manager and by external technological, industrial, accounting, financial or legal experts. The process involves, but is not exclusive to:
• Management due diligence: verification of the motivation and reputation of the key players within the company.
• Commercial due diligence: research into the company’s products and customers and the markets in which the company is active. This may be supplemented by a market study.
• Financial due diligence: research into the histori-cal financial data of the company, the real value of its assets, and taxes owed or other financial commitments.
• Legal due diligence: this will typically focus on the implications of ongoing disputes, the prop-erty rights to assets and intellectual propprop-erty rights.
The insights gained through the due diligence process may form the basis for readjusting the business plan. If the result of the due diligence is positive, then the chief conditions for the invest-ment will be discussed, and usually set down in a term sheet. Thus, for example, the valuation of the company as initially agreed upon during the first phase of negotiations may be adjusted based on the new information obtained during the due diligence. In addition, the term sheet contains the stipulations concerning the financial structure of the investment, the control of the company, such as the composition and functioning of the Board of Directors, the compensation for the management team or the desired exit arrangements. The stipula-tions of the term sheet will be further elaborated later in the detailed investment contract.
Once an agreement has been reached about all aspects of the term sheet, this is followed by the “closing”. The investors will carry out the final formal controls and necessary legal steps will be taken, such as modifying the articles of association and drawing up a detailed investment contract including a shareholder agreement. Only when all of these steps have been positively concluded, can the investment take place. Up until the last mo-ment, any mishap may derail the entire investment process.
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NEGOTIATIONS WITH BANKS
Particularly in buy-outs, in addition to private equity investors and the management team, banks will also play a crucial role. In smaller transactions, a single primary banker will be sufficient, but for larger transactions, multiple banks will form a syndicate and generally provide financing according to similar terms. Together with the private equity investors, the management will present a business plan to the bankers. Given the extensive experience of the private equity financiers, they generally maintain good relations with multiple banks and can make a good prediction in advanced of the pos-sibilities for bank financing. This facilitates the negotiations, of course. Based on the business plan, the banks will indicate how much and subject to what conditions they wish to provide financing. Together with the private equity investor the management team will have to choose one or more banks based on a number of criteria, such as:
• the size of the loan and interest;
• the flexibility for obtaining additional financing; • the stringency of the protective clauses (“covenants”);
• the banker’s experience and the personal relationship with the banker.
The contracts established between the private equi-ty investors and entrepreneurs are often highly com-plex. Entrepreneurs are clearly in a weaker position here compared to sophisticated and experienced investors. Professional investors have undergone a learning process through previous investments or through the input of their co-investors, so that they know which clauses they can use to protect the investor and to transfer a part of the risks from the investor to the entrepreneur. For entrepreneurs who have little experience in this area, it is important to gain advice before signing any investment contracts. However, it is important to realise that contracts, no matter how sophisticated they may be, can never
resolve all potential future problems. An investor should therefore be treated in a fair way and the relationship should be one of trust, worthy of any partner. Despite the importance of contracts, in the end an investment depends on trust.
Both entrepreneur and investor must respect this trust. The due diligence process also provides the entrepreneur with an opportunity to assess whether the investor is worthy of this trust. It is advisable for the entrepreneur to perform a due diligence process on the investor as well. Talking to entrepreneurs who have already worked together with the intended investor can be useful in this context.
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
4.4. The role of professional advisors in the investment process
In addition to management teams and private equity investors, numerous advisors play a crucial role in the investment process. Both managers and investors typically call upon professional advisors to assist them during the negotiations.
For entrepreneurs, accountants or consultants are often the first people to turn to. They will chiefly help entrepreneurs in translating the company strategy into a business plan. Good accountants and consultants will draw attention to a number of critical aspects in the business plan, such as the feasibility of the major fundamental assumptions in the financial plan. Then they will help the entrepre-neurs in their search for suitable investors, potenti-ally through the organisation of a “beauty contest”. In addition, accountants and consultants also form a central contact point for the private equity inves-tors during the due diligence process. Thus, they can play an important role in the negotiations with the private equity investors about the valuation of the company, the structuring of the investment and other important contractual stipulations. They also play an important role in the negotiations with banks about the bank credit. In fact, it is not only a matter of negotiating the amount of bank debt that one wishes to carry and the interest payments asso-ciated with it, but also about the protective clauses (“covenants”). Since these protective clauses, such as the demand for the retention of a certain amount of net working capital, can have an important impact on the way that business is conducted later, clear agreements in this area are essential.
Lawyers and tax advisors will be largely responsible for the legal aspects of the investment and for optimising the fiscal aspects of the company prior to the investment, but also in connection with the transaction. As already indicated, private equity investors tend to use complex contracts. Lawyers can help the management to better understand all of the aspects of these contracts.
Access to professional advice does not come for free, of course. The costs can mount rapidly. That is why it is important to have a good view of the costs for all the tasks that will be carried out on your behalf by external experts. Furthermore, it is important to agree in advance who will be responsible for the costs for the extensive due diligence.
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intRODuctiOn tO tHE MaJOR
VaLuatiOn tEcHniQuES
For various reasons, it is necessary to assign a value to the company when private equity is sought. After all, when private equity investors acquire shares in exchange for their investment, the value of the company needs to be known in order to determine the percentage of shares that they will acquire. Just as with the valuation of any other economic property, the value of the company is determined, in the first place, by the value of future cash flows that the company will be able to gener-ate for the investors. The risk of these cash flows is also important, since this will determine the returns demanded by the investors. The result of a valuation exercise will be highly dependent on who is performing it. For example, a strategic investor will typically value companies higher than financial investors since, in the first case, not only financial motives play a role but also strategic reasons such as access to knowledge, technologies and expected synergies. Below, we shall restrict our attention to a brief discussion of the valuation methods that are typically used for the valuation of established companies.
5.1. Discounted Cash Flow (DCF) method
The DCF method is the standard method that is used for the valuation of established companies. According to this valuation method, the value of a company is equivalent to the current value of all fu-ture free cash flows that the company is expected to generate: the free cash flows are the funds that the company generates through its operations and which are available for distribution to its financiers (shareholders and creditors) without jeopardising the company’s business continuity (in other words,
after investment in tangible assets and working capital, which are necessary to ensure the future operational cash flows).
Since the free cash flows are payable to all financiers (shareholders and creditors), the average required return, which is used to calculate the current value of the cash flows, reflects the returns required by the creditors (or the average interest costs on the debt after taxes) as well as the returns demanded by the shareholders. This is the Weighted Average Cost of Capital.
5
CALCULATION OF THE
FREE CASH FLOWS:
Operating profit before taxes (EBIT: Earnings Before Interest and Taxes)
- Operational taxes (EBIT x tax rate) + Depreciation and amortisation = Operational cash flow - Investment in tangible assets
- Investment in net working capital requirement = Free Cash Flow
With FCF = Free Cash Flow and R = investors required rate of return.
Value of the company =
Σ
FCFt (1 + R)t = FCF1 (1 + R)1 + FCF2 (1 + R)2 + FCF3 (1 + R)3 + ... t=1 ∞G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
The return required by private equity investors is higher than the return that investors hope to obtain through the stock market. A number of factors un-derlie this difference. On top of the compensation for the systematic risk, private equity investors in fact demand a premium because they are acquiring non-liquid shares. Moreover, they not only want to see returns for their financial contribution, but also for the fact that they are very actively involved in the management of the companies in their portfo-lio. Investors on the stock market are generally pas-sive investors, who simply track their shares from a distance. The time and effort that private equity managers invest in their portfolio companies also needs to be “remunerated”. All of these factors together therefore make the returns required by private equity investors for growth financing and buy-outs typically between 25% and 35% per year. The cost of the loan capital is the average interest rate that the company would pay if, at the time of the valuation, it would enter into new debts with comparable characteristics. The cost of the loan capital is multiplied by (1-t) since interest payments constitute a tax advantage for profitable compa-nies. Naturally, non-profitable companies cannot take advantage of this and for these companies it would be equal to zero.
Cash flows that are expected in the future are worth less than the same cash flows obtained today. That is why the current value of the future cash flows is calculated at a discount (or by calculating back to their current value). The sum of all the discounted future free cash flows reflects the value of the total company to which all financiers are entitled. Predicting cash flows in the distant future is ex-ceedingly complex, time-consuming and unreliable. That is why a valuation of a company according to the DCF method is divided into two parts. In the first phase, the “explicit phase”, a detailed calcula-tion is made of the free cash flows over the course of C years. In the next phase, it is assumed that the last explicitly predicted free cash flow in year C will grow at a constant rate of growth indefinitely. The value of all of the cash flows after the explicit phase (calculated on time C) is what is known as the con-tinuing value and is calculated as follows:
With g = expected annual growth rate of the free operational cash flows
It is important to determine the continuing value with due care. The rate of growth (g) must certainly E = equity
D = loan capital (debt) T = E + D
WACC
= required returns (on E) x E/T + Interest (on D) x (1 - t) x D/T
Called (WACC). The WACC is calculated as follows:24|
not be overestimated. As an upper limit, it’s a good idea to take the nominal GDP-growth. If a higher value is used, one is assuming that ultimately, the company will grow larger than the entire economy!
The total value of the company according to the DCF method in two phases is equivalent to the current value of the cash flows during the explicit period and the current value of the continuing value:
VALUE OF THE COMPANY (“ENTERPRISE VALUE”) VERSUS
VALUE OF THE EQUITY (“EQUITY VALUE”)
In this text, we have so far emphasised determining the enterprise value. The enterprise value is the value of the assets of the company that are payable to all the financiers, including both shareholders and creditors. The value of the equity is smaller than the enterprise value, because the shareholders participate in the responsibility to repay the debts. The value of the equity is therefore obtained as follows:
Equity value = enterprise value – value of the financial debts
A number of other financial instruments may, however, form part of the capital structure of the company in addition to common stock capital and traditional financial debt. For example, companies may use convertible bonds, preferred shares and bonds with warrants. In order to determine the value of the shares of a company, the value of all of these outstanding financial instruments must be deducted from the total enterprise value. This is often a complex exercise. For more on the subject of the valuation of these complex instruments, we refer readers to the specialised literature.
Enterprise value =
FCFt
+
( 1 + R )t
Continuing valuec
( 1 + R )c
Σ
t=1c
G u id e d u c ap it al d e c ro is sa n ce e t d u b u y-o u t en B el giq u e
EV = Price (reference group) x working cash flow Business cash flow (own business) 5.2. Multiples
Since the valuation of a company is a difficult and subjective process, more than one valuation method is generally applied. Typically, the DCF-method forms the basis for the valuation but other methods may be used for comparison to check the reliability of the DCF valuation. The “multiple” method uses averages of valuations from a reference group of comparable companies. The valuation is summarised in a refer-ence number or multiple of a financial measurement that is referred to as a multiple. Frequently applied multiples include the profit ratio or the price-working cash flow (rate-EBITDA2) ratio. This method
assumes that if comparable companies are sold at, for example, an average of 7 times the present working cash flow, then the value of the company to be valued will also be approximately 7 times the current working cash flow of the company in ques-tion. However, this is only applicable if the average transaction was correctly priced, and if the target company is completely comparable to the companies used for comparison.
Concretely, when the business cash flow is used as a measurement, the value of the company in question (“enterprise value”) is determined as:
With W V = enterprise value
The information on multiples can be obtained by analysing the transaction values of comparable companies in equivalent transactions or equiva-lent publicly listed companies.
5.3. Specific valuation topics
• The effect of the degree of debt on the valuation of companies
In (leveraged) buy-out transactions, the transaction is financed with a proportionately large amount of debt. The debt package has an influence on the transaction value. The following elements are therefore important in valuing companies that are carrying heavy debts.
First of all, it is important to have an insight into the relationship between the degree of debt and the value of a company. An increasing debt rate will lead to an additional tax advantage. The free cash flows will increase as a result of the lower taxes that a com-pany must pay. However, the degree of debt cannot increase indefinitely since this also raises the risk of bankruptcy. When companies have a lot of outstan-ding debt, the likelihood is greater that they will no longer be able to meet their interest payments and amortisation of principal, whereby the company may land in bankruptcy or liquidation. In other words, with an increasing rate of debt, the potential costs of bankruptcy must also be taken into account. One problem with the valuation of companies with a high rate of debt is that it is often very difficult to assess the potential bankruptcy costs.
Secondly, the rate of debt does not remain constant over time. In buy-out transactions with a very high rate of debt, the rate of debt will typically decline over time. Creditors will expect that debts will be repaid, which will result in a rapid reduction of the debt load. The discount rate (weighted average ca-pital cost) that is used within the DCF model must be
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consistent with these changes in the company’s capital structure and must take into account the declining level of debt.
• Investment in business capital (“working capital”)
When companies grow, typically, more resources are absorbed into the operational cycle (such as in stocks or customer receivables), which constitutes a company’s working capital. The working capital is partially financed through supplier credit. The rest needs to be financed through external financ-ing. Certainly companies aspiring to achieve rapid growth need to take into account that the working capital will automatically increase as the company grows, due to the fact that the necessary invest-ments in stocks and customer receivables will generally increase much more rapidly than the available supplier credit. Growth in working capital therefore absorbs a part of the operational cash flows. The free cash flows must therefore be cor-rected for this growth.
We shall conclude with an important remark. The enterprise value that is ultimately obtained, is by definition not the same as the price that will be paid for the shares in the company. The price is negotiated, after all, between entrepreneurs and financiers and will thus also be influenced by a range of tangible and subjective factors. The nego-tiation strengths of both parties play an important role here, but also, for example, the entrepreneur’s expectations of the financier. If the entrepreneur considers that the private equity financier can make a very positive contribution to developing the company, then he or she may be prepared to settle for a lower price. One can however not start negotiations without proper preparation. In this chapter, we have explained the standard valuation methods that are typically used to obtain a picture of the value of the company. For readers wishing to study the subject of valuation in greater depth, we have listed a number of titles in the reference list.
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Private equity investors often use a mix of complex financial instruments, but entrepreneurs are not always aware of their implications. That is why, in this chapter we shall present an overview of the most commonly used financial instruments. Figure 6.1 shows how each financial instrument is
charac-terised by a certain risk for the investor and how an expected return is linked to this risk. The higher the risk, the higher the expected returns. We shall begin with a brief discussion of the two extremes, namely, traditional debt and common stock capital, before discussing the more complex instruments.
FinancaL inStRuMEntS uSED BY
pRiVatE EQuitY inVEStORS
6
Figure 6.1.: Financial instruments according to risk-return profile
Required
Return
Mezzanine
Financing
Risk
Traditional debt capital
Debt capital with ‘equity kickers’
Outstanding debt capital Preferred share capital Common share capital
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6.1. Traditional debt capital
Debt financing involves the promise that inter-est payments will be made at certain times and that the borrowed amount will be repaid. Unlike share capital, the debts have given running time. Ordinary debts are not guaranteed but creditors are paid before the shareholders. It is possible for guarantees to be requested. The hierarchy of debt determines which debts will be repaid first. Privileged creditors are repaid first, and then ordinary creditors, followed by outstanding credi-tors. In comparison with shareholders, creditors have a lower risk, since they are repaid before the shareholders. That is why creditors expect a lower return than the shareholders. Furthermore, credi-tors have no voting rights at the General Assembly of shareholders.
Providers of credit make their decisions to grant credit primarily on the basis of the credit and re-payment capacity of the company. Within buy-out transactions, large amounts of debt are often used and banks therefore play a crucial role. For both the management and private equity investor, it is important to know how much debt the company can carry, since this determines how much share capital is necessary to be able to purchase the buy-out candidate, in light of a certain transaction price. Banks and other financial institutions will typically apply a number of criteria to determine the maximum amount of debt they wish to grant to a company.
• Coverage ratios. In order to determine the risk of the company being incapable of repaying
the credit and interest owed, a comparison is often made between the before tax operating profits (or alternatively the working cash flow) and the interest payments and the outstanding debt. In order to manage their financial risk, creditors establish minimum coverage ratios with which the company must always comply. • The company’s equity. Companies with more equity have a greater chance of surviving temporary internal problems or external shocks. The company’s equity, in other words, acts as a buffer. The required minimum ratio of equity to the total assets may vary, for example, from 20% for real estate companies to 40% for production companies. In addition to the ordinary share capital, other financing instruments, which must be repaid after debts in the case of liquidation, must be taken into account in order to calculate the equity ratio. • The presence of assets that can be used as
guarantees. To what extent are there sufficient
saleable assets present that can be sold if the company would be unable to repay its debts? Banks will traditionally apply different weighting coefficients depending on the liquidity of the as-sets and the predictability of their selling price.
Most debt contracts also contain clauses (“cove-nants”) that impose restrictions on the company. The purpose of these clauses is to limit the chances of financial difficulties and bankruptcy in so far as possible. Thus, there will often be clauses that require the debtor to retain a certain minimum
G ro w th c ap it al a n d B u y-o u ts G u id e fo r B el gi um
amount of net equity or to limit the payment of di-vidends. Debts have the advantage that the interest payments are deductible from the taxable profits. Debts also make it possible to use the financial lever-age effect whereby the returns on the equity are higher when the operating returns of the company exceed the cost of the debt. The greatest disadvan-tage of debt financing is that the company’s risk increases along with the degree of debt. After all, debts bring fixed payment requirements, which can result in bankruptcy if business takes a downturn.
6.2. Ordinary share capital
An (ordinary) shareholder has a share in the com-pany and is therefore a co-owner of the comcom-pany. The shareholder has voting rights in the general
assembly of shareholders3. Ordinary shareholders
have no right to dividends before the interest to creditors has been paid and preferred dividends have been issued. The shareholders bear the chief risk in a company. They are the last party to be paid in the event of bankruptcy, after all other parties. They therefore have weak liquidation rights. In the event of bankruptcy, however, there are generally significant decreases in value and the cost of the bankruptcy must be taken into account, so that often, there is nothing left over for the sharehold-ers after the creditors have been repaid. However, shareholders are residual owners: any value that a company creates on top of the value of the debt is payable to the shareholders. Private equity investors invest chiefly with the hope of realising significant added value in the future.
DISTRIBUTION OF THE ENTERPRISE VALUE AMONG SHAREHOLDERS
AND CREDITORS: AN ExAMPLE
Imagine that a company is financed with a combination of debt (value: 1500) and equity.
Figure 6.2. illustrates how the value of the company is distributed among shareholders and creditors. If the value of the company is higher than 1500, the creditors will receive the full amount of the loan repaid (1500), while the rest goes to the shareholders. If the value of company is greater than the val-ue of the debt, then the additional valval-ue created by the company will be paid in full to the sharehold-ers. There is therefore no upper limit on the returns for the shareholdsharehold-ers. If the value of the company is lower than 1500 however, then the total value of the company will be paid to the creditors and nothing is left over for the shareholders. In this case, even the creditors will not be completely repaid.
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Figure 6.2.: Combination of debt capital and
ordi-nary share capital
6.3. Mezzanine financing
Mezzanine financing encompasses financing instru-ments which, in terms of risk, (and therefore also in terms of expected returns) are situated between low-risk classic debt financing and high-risk share financing. There are various institutions that offer mezzanine financing, including (the private equity subsidiaries of) banks, financial institutions special-ised in mezzanine financing or government institu-tions. Often, private equity financiers themselves also invest in a combination of ordinary share capital and mezzanine financing.
Below is an overview of several forms of mezzanine financing.
• Preferred share capital
Preferred shares have characteristics of both shares and bonds. Like with ordinary shares, preferred shares grant an entitlement to one vote per share (with the exception of preferred shares without voting rights). Preferred shares, like ordinary shares, also do not have an expiration date. In the event of liquidation, the preferred shareholders come after
the creditors, but before the ordinary shareholders, which means that the risk for preferred shareholders is lower than for the ordinary shareholders. Private equity investors will virtually always want preferred shares in exchange for their investment, whilst the entrepreneurs and the management team typically acquire ordinary shares (and therefore carry the greatest financial risk).
The most common form of preference for preferred share capital is a preferred dividend. Generally, pre-ferred dividends have a cumulative character. That means that the non-paid out preferred dividends are carried forward to the following years. Before the company can pay out a dividend to the ordi-nary shareholders, it must first pay the preferred dividends. The payment of a preferred dividend falls under the competence of the General Assembly of shareholders, at the proposal of the Board of Directors. Failure to pay a preferred dividend is therefore not a legal shortcoming on the part of the company, and it therefore cannot be regarded as a cessation of payments.
Generally, but not always, preferred shares also par-ticipate in the added value created by the company. Depending on the way in which preferred shares participate in the added value, three categories of preferred shares can be distinguished: ordinary preferred share capital, convertible preferred share capital and participating convertible preferred share capital.
Ordinary preferred share capital is the simplest form. Typically it has a fixed dividend that is often
cu-0 500 1000 1500 2000 2500 3000 3500 3000 2500 2000 1500 1000 500 0
Traditional debt capital Ordinary share capital Total value of company
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mulative, but does not take part in added value. Potentially, there is a possibility to repay the ordi-nary preferred share capital early, at specific times or when certain events such as an initial public of-fering occur. In this way, the investor can recuperate his initial investment earlier. Convertible preferred share capital is preferred share capital whereby the preferred shareholder has the option to convert the preferred shares to ordinary shares. The preferred shareholders thus have the choice of whether they want to derive their returns from (a) the repayment of the nominal value of the preferred shares or (b)
by participating in the added value after conversion into ordinary share capital. It is clear that when the value realised through conversion is larger than the nominal value of the preferred shares, the preferred shareholders will choose to convert their preferred shares into ordinary shares. Preferred shareholders will usually be required to convert their preferred shares into ordinary shares if a company is launched on the stock exchange, because public capital mar-kets often have a preference for companies with a simple and transparent financial structure made up of ordinary shares and traditional debts.
ORDINARY PREFERRED SHARE CAPITAL: AN ExAMPLE
Imagine that the management of a company decides to proceed with a buy-out and buys out the existing shareholders for an amount of 2000. In order to finance this transaction, a private equity investor has been found who is willing to invest 1500. The remaining 50