Leveraged buy-out (LBO) and private company loans

  • LBO debt is debt provided to private equity firms to facilitate the acquisition of a target company.
  • Revolution targets a 40% portfolio allocation to LBO and private company loans.

Giant wave of private equity capital to deploy

In Revolution’s opinion one thing appears certain, there are likely to be more deals in the market in 2019 as private equity firms with record levels of dry powder look to deploy capital. Revolution estimates that at least A$9 billion of funding is available for investment today within the Australian private equity market.
The Australian private equity market is a mature market and consists of many participants, many of which Revolution will support, having long standing and deep relationships withfirms such as KKR, The Carlyle Group, BGH Capital, Quadrant, TPG, Pacific Equity Partners (PEP), Blackstone, Affinity, CHAMP, Archer Capital and other smaller participants. The typical private equity LBO capital structure is approximately 50% debt / 50% equity, suggesting there is likely to be a significant pipeline of LBO debt opportunities in the years ahead.

Key protections being stretched
Revolution has recently observed transactions in the market where key terms and leverage are being stretched, making them less attractive to lenders. In a period of expected gradual economic slowdown, these transactions are increasingly susceptible to underperformance without the benefit of key structural protections including regular financial covenant testing and scheduled amortisation and/or cash flow sweeps. With over 50 years of combined experience, the Revolution investment team has seen these trends before and remains focused on finding the best risk-adjusted opportunities, whilst maintaining a high level of discipline.

Public-private take-outs
In the first quarter of 2019, there has been a surge in the search for financial sponsor financing. This involves the large private equity sponsors including Apax, BGH Capital, Brookfield, KKR and TPG utilising LBO financing to back public-to-private take-outs with enterprise values of A$1 billion or more. In each case, the sponsors have been granted due diligence access by the respective Boards of the target companies, with several of these transactions approaching conclusion.

This is a notable change given that over the last decade private equity firms have had little success in swaying Boards and target company shareholders to accept their proposed acquisition terms. This means the potential pipeline for origination in this part of the market looks increasingly healthy.

Private and public company debt finance
From a debt financing perspective, Revolution has observed financial sponsors being opportunistic, considering the positive and negatives of:
• traditional bank/holding company mezzanine market;
• the APAC uni-tranche market;
• the offshore capital markets.

The US & EU leveraged finance and the APAC uni-tranche markets have seen the most activity thus far, given their flexibility in contractual terms and market capacity, though Revolution expect the local bank market to be more active in 2019, after a quiet 2018, with discussions already taking place on various transactions.

The opportunity awaits
Revolution is currently seeing a large pipeline of opportunities across multiple sub-sectors of the Australian and New Zealand private company and LBO market. While the expectation of transactions following a more traditional bank financing structure is welcomed, capital protection and risk management remain at the core of Revolution’s DNA. Revolution will continue to focus on stable, defensive businesses and industries financed through traditional bank syndicates, while businesses operating in cyclical industries with high debt loads will continue to be avoided. Structural protections are key features in the market that the Revolution investment team highly value, and while we may participate in TLB or unitranche transactions (which are typically characterised by slightly higher leverage and softer structural protections), we will only extend such liberties to those companies that pass our detailed and stringent due diligence process.

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This information has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’). Channel Investment Management Limited ACN 163 787 353 AFSL 439007 (‘Channel’) is the Trustee and issuer of units in the Revolution Private Debt Fund I. This email (including attachments) is subject to copyright, is only intended for the addressee/s, and may contain confidential information. Unauthorised use, copying, or distribution of any part of this email is prohibited. Any use by unintended recipients is expressly prohibited. To the extent permitted, all liability is disclaimed for any loss or damage incurred by any person relying on the information in this email. Although every effort has been made to verify the accuracy of the information contained in this document, Revolution, Channel, its directors, officers, representatives, employees, associates and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by any person directly or indirectly through relying on this information.  The information in this document is not financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular person.  All investments involve risk. Past performance is not a reliable indicator of future performance. For further information and before investing, please read the offer document which is available upon request.