10.5 Private Equity and Refinancing 385Table 10.1. Refinancing
(1) Acquisition- The private-equity firm founds a holding company and invests some equity capital in
it. - The holding company borrows a lot of money (bridge loan) in order to buy all shares
in the target company. A high gearing increases return on equity invested by the pri-
vate-equity firm. - If all shareholders have not sold their shares, the holding company will use the
squeeze-out mechanism. - The holding company has now obtained all shares in the target company.
- If the target is a listed firm, it is taken private.
- The private-equity firm wants the holding company to repay the bridge loan from the
assets of the target company. The question is how, because distributions to sharehold-
ers are heavily restricted.
(2) First round of refinancing- The first round of refinancing starts.
- The holding company can make the target company distribute all distributable assets
in the form of dividends; and the holding company can distribute assets to the private-
equity firm. - The holding company and the target company merge. After the merger, the debts of
the holding company and the assets of the target company are the debts and assets of
the same company (henceforth “the new company”). The bridge loan can therefore be
repaid from assets that used to belong to the target company. - The new company is loaded with debt. It must sell assets in order to cope. Assets are
sold as a going concern, but assets can also be sold in other ways: sale and lease-back
of buildings and real estate and machines etc, securitisation of receivables, the closure
of factories and the sale of production assets. - Short-term debt is replaced by long-term debt.
(3) Second round of refinancing- There can also be a second round of refinancing.
- The new company can borrow more money.
- This again enables the new company to distribute all possibly distributable assets to
the sole shareholder.