Sources of finance for leveraged buy-outs
Sources of finance for leveraged buy-outs

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Sources of finance for leveraged buy-outs
  • Equity
  • Senior debt
  • Junior debt
  • Determining the funding structure

Most leveraged buy-outs will be funded using a mixture of equity and debt. How the funds are applied will vary from transaction to transaction but the finance will typically be used to:

  1. acquire the target business—this will normally be by way of direct payment to the seller

  2. cover the costs and expenses of the transaction such as advisers' fees, and

  3. refinance any existing debt

The purpose of the transaction may be to refinance existing debt or to return capital to the sponsor without a full exit, known as a 'leveraged recapitalisation' rather than to purchase a target (see Practice Note: What is acquisition finance?).

This Practice Note looks at:

  1. how the investors will contribute equity into the group and the types of equity that may be used

  2. possible types of debt, including senior facilities, mezzanine facilities, second lien facilities, PIK or payment in kind facilities, unitranche facilities, senior secured and subordinated notes, and

  3. factors involved in determining a funding structure

For an introductory guide to acquisition finance, see Practice Note: Acquisition finance—introductory guide. For a glossary of key terms and jargon, see the Glossary of acquisition finance terms and jargon.

Equity

Provision of debt finance will be conditional on a certain proportion of the finance being contributed by way of equity. The equity contribution as a proportion of the whole