Buyout Capital is a form of risk capital provided by private equity investors to fund financial or corporate restructuring in private or publicly traded companies with a history of stable earnings. However, though the name suggests otherwise, buyout PE funds may not always seek to acquire controlling stakes in portfolio companies.
Buyout funds typically create value by a) better corporate governance and b) operational and financial restructuring. Better fiscal discipline and tax benefits due to higher debt levels typically drive the financial restructuring process. PE funds also bring operational excellence into management practices as most funds have managers with operational experience and extensive industry knowledge. Buyouts can be broadly classified in MBO/MBIs (Management Buy-Out/Buy-Ins), LBOs (Leveraged Buy-Outs) and RLBOs (Reverse LBOs).
- Business recapitalization or exiting the venture is difficult if the firm is facing temporary earnings or cash-flow problems
- If the management is planning to buy out the owner's stake (MBOs), often owners are not confident if the management will be able to arrange for funds to complete the transaction
- Bringing active equity ownership in a private company
- Detailed analysis of financial statements to improve the balance sheet capacity of the target company
- Redevelop the company's business plan to highlight value creation for equity owners
- Bring active equity ownership to the private company while ensuring best value for present owner
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