Private equity financing—debt

The following Corporate practice note provides comprehensive and up to date legal information covering:

  • Private equity financing—debt
  • Types of debt and debt providers
  • Senior debt
  • Senior facilities agreement
  • Other facilities
  • Junior debt
  • Mezzanine debt
  • PIK debt
  • Bonds, notes and other high yield debt
  • Securities and intercreditor arrangements
  • More...

Private equity financing—debt

The vast majority of funds for a traditional private equity buyout will be sourced from debt, rather than equity, finance.

Unlike a buyout, a venture or development capital investment will rarely have a significant debt component to the investment structure.

Types of debt and debt providers

Debt in the context of a buyout refers to debt finance raised from financial institutions such as banks, pension funds, insurance funds, hedge funds or other financial institutions, eg leveraged loan funds, mandated to invest in debt.

These financiers will generally be third party investors not otherwise connected with the transaction, rather than the private equity investor or management.

The type of debt they provide is debt in the traditional sense, rather than the hybrid, quasi-debt or debt instruments, eg preference shares or loan notes, which form part of the equity investment by the private equity investor or management.

Debt is generally categorised as either senior debt or junior debt. Senior debt is usually in the form of a term loan of a principal sum (sometimes in tranches) and, often, a revolving facility. Junior debt can take a number of forms (including mezzanine debt, bonds or notes) and is generally more expensive for the borrower and a riskier investment for the lender.

There are often various levels of debt finance, especially in larger buyouts, and this will be reflected in the buyout structure.

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