What terms are currently being offered to management teams by financial investors and how have these trended over time? Do they differ depending upon deal size or deal type?
Using data collected from Financial Investor proposals to Management Teams covering the period from 2006 to the end of 2017 we have analysed some of the key metrics and trends.
The data over this period comprises over 150+ different proposals put to Management Teams from some 80+ different Private Equity Investors, ranging from lower mid-market Primary management buy-outs to large cap tertiary auctions. While the businesses are UK or European based, many are global businesses and they are from all sectors of the economy with Financial Investors from the UK, US Europe and the Far East.
In this article we look at Base Sweet Equity allocations that have been agreed with winning bidders and how they differ across deal size, competitiveness of deal and how and why they have changed over the last six years to December 2017;
Key Findings - Base Sweet Equity
In the last three years, the average Base Sweet Equity made available to Management Teams was 18.8% with deals under £100m providing higher allocations than those in the above £250m range.
But what do these percentages mean for Management Teams and the potential financial outcomes on an eventual exit?
In the last three years the average MoM, assuming a 4-year exit horizon across all deal sizes, that a £1 Investment in Sweet Equity was projected to achieve was over 200x illustrating the potential returns that Sweet Equity can achieve.
This equates to an average Sweet Equity allocation of £43m with larger deals offering larger potential returns of c£83m, but typically spread across a wider team.
Do management get a better or worse deal in a competitive auction process?
Using a 10x EBITDA multiple paid for a business as a proxy for “competitiveness”, deals where the EBITDA multiple paid for the business was less than 10x had an average Sweet Equity percentage of 19.4% and for those where the price paid was higher than 10x it was 18.5%. A variance of nearly 1%.
Interestingly a third of the winning bidders in this period provided a Ratchet, in addition to the Base Sweet Equity, that increased the Management Sweet Equity allocation above agreed Multiple of Money hurdles and these were almost exclusively offered in deals where the EBITDA was over 10x, improving the financial outcomes to Management above pre-agreed Hurdles.
How has the Sweet Equity deal changed over time?
Below is the data for the three years ending 31 December 2014;
The average Sweet Equity allocation in the three years to December 2017 has increased by 0.7% from 18.1% to 19.8% and more importantly the average Sweet Equity potential has increased by some 40% from £30.7m to £43m across all deals.
This increase in the average Sweet Equity potential is partly due to mix of deal sizes but also reflects falling Loan Note/Preference share coupon hurdle rates that Financial Investors apply to their funding;
The trends for Management Teams are positive with increased Sweet Equity allocations, falling Hurdle rates, additional upside from Ratchets and strong competition for the right opportunities from Financial Investors.
These factors can significantly change the economic package that Management Teams receive and therefore the whole of the economic proposal needs to be considered and modelled out for each offer and for each Management Team.