Acquisition Capital

Acquisition Capital consists of a variety of different forms of financing and can include debt capital, equity investment and hybrid forms as well. The common theme is that acquisition capital is used in an acquisition scenario where a company is being acquired. Due to market level of acquisition prices that most companies trade at, acquisition capital extends well beyond conventional bank loans into a region known as the risk capital layer within a transaction structure. Acquisition capital is generally comprised of several layers of different forms of capital, similar to a two-layer or three-layer cake.

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Different Forms of Acquisition Capital

Within a two layered acquisition capital structure the senior lender (bank) is the top layer, and the subordinated lender (mezzanine lender) is the bottom layer. The top layer is low risk, and the bottom layer is high risk and dependent on the future cash flow performance for ultimate debt repayment. Unitranche loans embody both senior and subordinated layers. Hybrid debt equity acquisition capital structures embody both subordinated debt and equity layers. The composition of the layers for each acquisition capital structure is unique. The layering composition is reflective of a number of factors including the purchase price, type of acquirer, risk appetite of the acquirer and the growth strategy. Acquirers pursuing roll-ups with high amounts of equity in their business usually favor non-dilutive unitranche loan structures with delayed draw term loans to fund future acquisition growth.

Pricing of Acquisition Capital

Debt Capital is priced according to the measurement of credit risk by the lender which is gauged by the leverage multiple and the loan to value percentage. Senior loans range from 7.5% to 10% interest rates while unitranche and mezzanine range from 9% to 14% interest rates on an annual basis. Hybrid forms such as structured equity range from 15% to 20% but is paid in the form of principal accretion at maturity. Private equity or growth equity investors target 18% to 25% per year with their return coming through capital appreciation of the shares reflecting overall value growth of the company.

Pros and Cons of Acquisition Capital

Acquisition capital expands the financial resources of the company allowing it to expand much faster with greater strategic emphasis. It gives a company growth paths that are unavailable through its own limited capital base. This can make a major difference in the overall growth journey as many companies forgo growth because they lack adequate capitalization. The ability to attract acquisition capital provides new and innovative ways for an acquirer to grow, and leads to greater value creation long term, provided it is used prudently in a sound acquisition transaction. The acquisition capital does not in and among itself create value nor can it make a bad acquisition deal good. It must be put to productive use within an acquisition scenario that builds values from an innovation, customer value and operational standpoint. Acquisition capital that is too expensive with exorbitant equity pricing can bleed the value out of the business and lead to a subpar outcome for the owner. Acquisition capital is a highly sophisticated form of finance and needs advisor expertise to manage properly.

Frequently Asked Question

1. What are the transaction size ranges for acquisition capital?

Acquisition capital sizing for middle market deals starts at the $10 million ticket level and ranges to $175 million, depending on the lender’s view of the middle market. EBITDA ranges are $3 million to $40 million. Most of the activity is in the EBITDA range from $8 million to $20 million.

2. How do I design the proper acquisition capital structure?

It is best to hire an acquisition financing advisor who can review all of the nuances of your deal and decide on the acquisition capital structure that will most benefit you.

3. How long does it take to close an acquisition capital transaction?

Speed depends on the quality of the financial reporting. It can range from 45 to 90 days depending on how well prepared the company is for the lender due diligence process.

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