The different types of private equity transaction

Private equity offers a wide range of financial transactions enabling investors to acquire stakes in unlisted companies. Each type of transaction meets specific objectives and involves particular mechanisms. Understanding these different types of transaction is essential for any professional in the sector, whether investor, entrepreneur or advisor. This article presents the main private equity transactions, their characteristics and specific features.

Read more: Small cap, Mid cap, Large cap: what are the differences for private equity?

1) Leveraged Buy-Out (LBO)

The leveraged buy-out (LBO) is the most emblematic operation in private equity. It consists of acquiring a company using mainly debt, supplemented by equity provided by investors. Debt is generally repaid from the cash flow generated by the acquired company.

In an LBO, investors create a holding company which borrows to finance the acquisition. The target company is then merged with this holding company, and its assets serve as collateral for the loans taken out. Equity capital generally represents between 20% and 40% of the total purchase price.

LBOs enable investors to acquire companies with significant leverage, thereby increasing the potential return on equity invested. It also offers the opportunity to restructure the company and improve its operating performance.

The acquisition of Dell by its founder Michael Dell in 2013, with the help of the Silver Lake Partners fund, is a famous example of an LBO.

2) Management Buy-Out (MBO)

A Management Buy-Out (MBO) is a transaction in which a company's management team acquires all or part of the company's capital, usually with the help of a private equity fund. This operation enables managers to become majority shareholders in their company.

In an MBO, the managers join forces with a private equity fund to finance the acquisition. The fund provides part of the necessary capital, while the managers invest part of their savings, often leveraging debt.

The MBO enables managers to take control of their company and align their interests with those of the shareholders. It also offers an exit solution for existing shareholders, while ensuring continuity of management.

The buyout of French company Moustache by its management team in 2018, with the support of the UI Gestion fund, is a recent example of an MBO.

3) Management Buy-In (MBI)

Management Buy-In (MBI) is an operation in which a team of external managers acquires a company, usually with the help of a private equity fund. Unlike an MBO, the managers are not part of the target company prior to the acquisition.

In an MBI, external managers identify a target company and partner with a private equity fund to finance the acquisition. The managers contribute their expertise and experience, while the fund provides the necessary capital.

MBI enables experienced managers to take control of a company and implement their growth strategy. It also offers an exit solution for existing shareholders, while bringing new skills and a new vision to the company.

The acquisition of the British company Hobbycraft by a team of external managers, with the support of the Bridgepoint fund, is an example of MBI.

4) Buy-In Management Buy-Out (BIMBO)

The Buy-In Management Buy-Out (BIMBO) is a hybrid transaction combining elements of both MBO and MBI. In a BIMBO, part of the current management team joins forces with external managers to acquire the company.

In a BIMBO, internal and external managers join forces with a private equity fund to finance the acquisition. Internal managers contribute their knowledge of the company, while external managers bring new skills and a fresh vision.

BIMBO combines the advantages of MBO and MBI. It offers an exit solution for existing shareholders, while ensuring management continuity and bringing new skills to the company.

The acquisition of the French company Groupe Partouche by a mixed team of internal and external managers, with the support of the PAI Partners fund, is an example of a BIMBO.

5) Owner Buy-Out (OBO)

An Owner Buy-Out (OBO) is a transaction in which the current owner of a company buys back some or all of the shares held by other shareholders, usually with the help of a private equity fund.

In an OBO, the current owner teams up with a private equity fund to finance the purchase of shares held by other shareholders. The fund provides part of the necessary capital, while the current owner invests part of his or her savings, often benefiting from leverage through debt.

The OBO enables the current owner to regain full control of his company and align his interests with those of the other shareholders. It also offers an exit solution for minority shareholders.

An example of an OBO is the purchase of the shares held by minority shareholders in the French company FNAC by its majority shareholder, with the support of the KKR fund.

6) Leveraged Build-Up (LBU)

Leveraged Build-Up (LBU) is an acquisition strategy in which a company acquires several other companies in the same sector, usually with the help of a private equity fund. The aim is to create a larger, more competitive group.

In an LBU, the acquiring company, often a platform created specifically for this strategy, uses debt to finance the acquisitions. The cash flows generated by the acquired companies are used to repay the debt and finance new acquisitions.

LBU enables synergies to be created between acquired companies, increasing the size and competitiveness of the group, and achieving economies of scale. It also offers the opportunity to diversify activities and reduce risks.

The creation of the French LDLC group through a series of acquisitions in the IT distribution sector, with the support of the Naxicap Partners fund, is an example of LBU.

Other types of private equity transaction

Growth Capital

Growth Capital is a form of investment in which a private equity fund provides capital to a company to finance its growth, without necessarily taking control. This enables the company to grow while retaining its independence.

Turnaround

Turnaround is an operation in which a private equity fund acquires a company in difficulty and implements a recovery plan to put it back on its feet. This often involves in-depth restructuring of the company and active management on the part of the investors.

Secondary Buy-Out (SBO)

Secondary Buy-Out (SBO) is a transaction in which a private equity fund sells a company to another private equity fund. This transaction enables the selling fund to realize a capital gain, while the acquiring fund can pursue the company's growth strategy.

Public to Private (P2P)

Public to Private (P2P) is a transaction in which a private equity fund acquires a listed company and then delists it. This allows the company to benefit from more flexible, long-term management, without the constraints of a stock market listing.

Alongside all these models, there are also hybrid models, which combine several of them (LBO-MBO, LBO-MBI, LBU-MBO, etc.).

Conclusion

Private equity offers a wide range of financial transactions, each with its own specific objectives and mechanisms. Understanding these different forms of transaction is essential for any professional in the sector, whether investor, entrepreneur or advisor.

Whether you opt for an LBO, MBO, MBI, BIMBO, OBO, LBU or another form of transaction, it's important to understand the specifics of each type of operation and adapt your strategy accordingly. Private equity offers a multitude of opportunities, and the choice of transaction will depend on the objectives, skills and resources of each individual.