 Using Leverage to Enhance Liquidity
(Leveraged Recapitalization)
Leveraged recapitalization transactions can be very attractive to entrepreneurs who desire to realize value from their financial and human investment into their companies, but who also want to participate in further upside. TA-led leveraged recapitalizations usually enable management to retain majority control of the company, and in some cases, management can actually increase its percentage ownership.
The leveraged recap structure is relatively simple:
- Combination of TA equity and/or subordinated debt and third party senior debt used to finance a repurchase of existing shareholder stock
- TA in either minority or majority ownership position post-recap
- Distribution to existing shareholders achieved in a tax-efficient structure
- Transaction structured to receive favorable accounting treatment
- Portion of the total capital raised often retained within the company to finance future growth
- TA's equity commitment is critical step necessary to complete the transaction with senior lender(s)
By using a modest amount of debt, TA is able to compete with public market values. As a result, a company can complete a private transaction that is not as dilutive as might be anticipated. Management gains valuable flexibility on the timing of an eventual IPO or exit, and also gains an experienced partner in TA. Since it is very difficult for management and selling shareholders to receive much liquidity in an IPO or in the immediate aftermarket, the leveraged recap offers an opportunity to diversify personal assets without being restricted by the disclosure and liquidity rules governing the public markets.
Examples of such investments include:
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