Nike (sponsor of Hunter Kemper and Cam Brown)
Under Armour (sponsor of Chris McCormack)
Triumph Group (owns Allied Aerospace, which operates the famous wind tunnel in San Diego)
Nike was a great buy 4 or 5 years ago. But I think they’re price has caught up to the stock’s value recently.
So why would the lender allow this type of loan? Seems like they would want the equity firm to have some risk in the deal? The lender also has big risk invested in this arrangement.
Guessing the same reason the bank lets you put your house up as collateral for the mortgage on the house?
Thanks
• Jeff
So why would the lender allow this type of loan? Seems like they would want the equity firm to have some risk in the deal? The lender also has big risk invested in this arrangement.
Guessing the same reason the bank lets you put your house up as collateral for the mortgage on the house?
Thanks
• Jeff
Exactly, the company has sufficient assets to cover a default. Many of these companys have such great cash flow that they have zero debt. Trust me, banks know what they’re doing when it comes to handing out commercial loans.
Your exactly right about return on investment. Do you think a 15% return is what they are looking for? HELL NO, remember on most deals they lose money, lots of it. Something has to compensate, they need 200-300% returns. How do they do that? When the company goes public! Anybody that tells you this isn’t the goal, is lying. They are not in the business of running companies, they want to be in and out in 3-5 years. Going public is the number one exit strategy they should be focusing on. If they aren’t doing that they aren’t going to be in the business long.
Anyway, as for your second point this is a high risk high reward deal for a bank and not a commercial bank type of deal. I actually misinterpreted the original posters scenario. I assumed the equity investor, actually had cash in the company, but it sounds as though he was referring to an LBO type scenario (but still some cash had to be provided). I don’t really understand the point, what is the private equity firm providing if not cash? A loan at 95% of tangible assets is bananas and the loan would be priced accordingly. The Company is extremely levered. What is the repayment model? My guess is they have some cash in the deal and they could very easily lose it. If potentially losing cash isn’t risky, feel free to lose some my way.
They are not in the business of running companies, they want to be in and out in 3-5 years. Going public is the number one exit strategy they should be focusing on. If they aren’t doing that they aren’t going to be in the business long.
Anyway, as for your second point this is a high risk high reward deal for a bank and not a commercial bank type of deal. I actually misinterpreted the original posters scenario. I assumed the equity investor, actually had cash in the company, but it sounds as though he was referring to an LBO type scenario. I don’t really understand the point, what is the private equity firm providing if not cash? A loan at 95% of tangible assets is bananas. The Company is extremely levered. What is the repayment model? Obviously, I don’t know all the details, but not a chance in hell I would do this deal without a guaranty from the equity partner. My guess is they have some cash in the deal and they could very easily lose it. If potentially losing cash isn’t risky, feel free to lose some my way.
Again, you are lumping all private equity firms into one pot. Different investors have different needs. Even though you are correct in saying that many (not all) of these firms want to get out in 3 to 5 years, going public is not the only option to them. The plan with the company I work for is to grow rapidly in the next three years by purchasing competitors and to build a strong infrastructure which included audited financial statements. Once the company looks attractive enough, the private equity firm could sell it to another private equity firm, sell it back to the original owners, sell it to a larger company in the same industry, etc. There are numerous scenarios that don’t involve a public offering; which, btw, is extremely expensive and risky. I would guess that at least 75% of a private equity firms holdings never become publicly held.
Banks are extremely conservative. Without an equity stake in a company, they have no upside to the risk they are taking. They want their money back and they want to earn a normal return. That’s it. The last thing they want to do is sell the assets of their customers.
And, unless you have an IQ below 90, you would lend money to these companies. They are strong financially, have adequate cash flows, a proven track record, customers, employees, leadership, etc. They also have a lopsided balance sheets – that is, millions in assets and absolutely no debt. The bank injects a sustainable amount of debt for the company, the equity firm uses the cash from the debt to pay off the owners, and then the equity firm is left with a self sustained operation that can hopefully be spun off in a few years.
The equity firm HAD to have put some cash into the company. They risk losing that cash, they don’t get paid before creditors. If the equity firm didn’t provide cash, what’s the point of the equity investor? How did they obtain equity in the company.
The equity firm HAD to have put some cash into the company. They risk losing that cash, they don’t get paid before creditors. If the equity firm didn’t provide cash, what’s the point of the equity investor? How did they obtain equity in the company.
Why do they have to provide cash?
Let’s say the founders of a bakery are getting old and want to retire. They have no family involved in the business; they just want to sell the company and get out. They think the company is worth $25,000,000.
Balance sheet:
Assets $30,000,000
Liabilities 0
Equity $30,000,000
Annual Cash Flow:
Positive $10,000,000 (owners typically pull money out of the company rather than leave it in equity)
A private equity company steps in and offers the owners of the bakery $25,000,000. The bakery obtains a loan for $25,000,000. The private equity firm pays the bakery owners $25,000,000. ZERO cash out of pocket.
New Balance Sheet:
Assets $30,000,000
Liabilities 25,000,000
Equity 5,000,000
The company pays off the loan in 5 years with its excess cash flows and once again has a strong balance sheet that makes it a ripe target for Global Bakery Inc., a billion dollar company.
I agree with most of your scenario, but a few points.
1 - Barry Bonds doesn’t step to the plate to hit a single or double. He intends to hit homeruns. So do all the private equity executives that I have met. There are plenty of other ways to get out of deals, but public equity is numero uno. Doesn’t happen very often I know, but its the goal.
2 - The point of contention I had was the fact that you say the private equity firm has no risk. The risk is their cash! If they didn’t put cash into the company, why are they there? You certainly don’t need an equity investor to obtain audited financials??
3 - If the company can obtain a loan at 95% of the value without a guaranty from the equity firm (it is possible) and the equity firm didn’t put in any equity(??), then why didn’t the company just take on the loan without the equity firm involved?
You call that a commercial bank deal!?? Are you kidding me? Let me go on the record now by the way and mention I actually am a commercial banker. Number 1 problem I have is who is going to run the bakery? The bakery was successful because of the current regime. What the hell does a private equity firm no about baking? Likely little. Now this deal may be a candidate for mezz finance or some other high yield debt product, but this is not a typical “commercial” bank deal.
I agree with most of your scenario, but a few points.
1 - Barry Bonds doesn’t step to the plate to hit a single or double. He intends to hit homeruns. So do all the private equity executives that I have met. There are plenty of other ways to get out of deals, but public equity is numero uno. Doesn’t happen very often I know, but its the goal.
2 - The point of contention I had was the fact that you say the private equity firm has no risk. The risk is their cash! If they didn’t put cash into the company, why are they there? You certainly don’t need an equity investor to obtain audited financials??
3 - If the company can obtain a loan at 95% of the value without a guaranty from the equity firm (it is possible) and the equity firm didn’t put in any equity(??), then why didn’t the company just take on the loan without the equity firm involved?
In the case of the company I work for the private equity firm did put $1 to $2 million in, but it went straight to the ex-owners, the company didn’t receive a dime. And my example was 100% make up, the bank would definately require an adequate post loan debt to asset ratio.
1 – no, not all private equity funds are looking for home runs. They are all looking for a rate of return that beats Wall Street averages but this could be something far less than triple digits. Imagine you are Yale University and have $100 million you need to invest. You aren’t going to gamble it away. You want an outstand return (and 20% annual growth is phenominal – do the math) with little risk.
2 – Private equity firms often provide expertise. They help a company with its infrastructure which is usually piss poor for a privately held company. They also help them with strategy which includes mergers and acquisitions.
3 – why would the owners want $25,000,000 in debt they have to pay back? They want $25,000,000 in their pocket without the need of payback. They want yachts and houses on the hill. They want to retire and leave the stress.
First, I made up the numbers to illustrate a point. I exaggerated to make it clear. As a commercial banker you can’t tell me the $10 mil free cash flow coupled with a strong balance sheet doesn’t look attractive.
You are correct, the former owners usually have a contract to stay on for 5 years or so, and they are paid very well to do so. And they don’t mind because the stress of risk is off their shoulders.
Do you know what beta is?
Do you have a background in investment banking?
The equity firm HAD to have put some cash into the company. They risk losing that cash, they don’t get paid before creditors. If the equity firm didn’t provide cash, what’s the point of the equity investor? How did they obtain equity in the company.
Why do they have to provide cash?
Let’s say the founders of a bakery are getting old and want to retire. They have no family involved in the business; they just want to sell the company and get out. They think the company is worth $25,000,000.
Balance sheet:
Assets $30,000,000
Liabilities 0
Equity $30,000,000
Annual Cash Flow:
Positive $10,000,000 (owners typically pull money out of the company rather than leave it in equity)
A private equity company steps in and offers the owners of the bakery $25,000,000. The bakery obtains a loan for $25,000,000. The private equity firm pays the bakery owners $25,000,000. ZERO cash out of pocket.
New Balance Sheet:
Assets $30,000,000
Liabilities 25,000,000
Equity 5,000,000
The company pays off the loan in 5 years with its excess cash flows and once again has a strong balance sheet that makes it a ripe target for Global Bakery Inc., a billion dollar company.
Honestly, this is so comical, please stop before you embarass yourself further.
mind telling us who you are talking in case somebody wants to insult you back?
What’s beta? You are talking risk and saying there are plenty of companies to buy with beta greater than 1, so what does that mean? You are the one that contradicted yourself, not me.
Beta is essentially a measure of how correlated the movement of an individual stock is with the movement of the overall market. I won’t bore you with the academic details, but a beta > 1 essentially means the stock is riskier than the market as a whole, and therefore, an investor in that stock should demand a return greater than the expected return of the market to compensate for the risk.
What I’ve learned today…90% of slowtwitchers don’t know jack about Private equity, investing, or the machinations of the stock market, while 10% are pretty savvy.
Note to anyone out there. Don’t ever, ever make a stock purchase decision based on anything you see on this or any other board.
Stan
Is your bakery still for sale?
agreed. i know what beta is, my point was that the poster did not. agree on the rest of your post.
need a partner?