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Mezzanine Financing: Tools, Applications and Total Performance by Luc Nijs

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8

Mezzanine and the Private Equity Space

It has been around four decades now since the first LBOs (leveraged buy-outs) emerged. A novel concept in the 70s, whereby investment firms took ownership of a company (often 100%, but definitely a majority stake) and funded the acquisition with only a sliver of their own equity and the rest with a syndication of all sorts of debt instruments. The idea was that the acquisition debt would be paid off (to a large degree) by the time that the firm was resold or brought back to the public market.

A definition of an LBO could therefore be:

A transaction in which an investor group acquires a company by taking on an extraordinary amount of debt with plans to repay the debt with funds generated from the company or with revenues earned from selling off the newly acquired company's assets. It seeks to force realization of the firm's potential by taking control of the firm. The leveraging up of the purchase is a temporary state pending the realization of that excess value. It allows for a democratic means of ownership and control, i.e. a management team can take a firm to the next level or spin-off and follow its own independent course.

The target market for this kind of transaction was:

  • Private businesses where the owner wanted to exit the business.
  • Private or public businesses where the management wanted to take control of the firm and take the firm to the next step – later known as MBO (management buy-out) or where new management came in (MBI ...

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