Blackrose Accountants reveals an article about PE buyout, it stated that at the end of 2021 there was $2.6tn worth of PE assets including cash. In addition, B rated bond or Loan notes represented the average credit rating of a PE firm assets.
Therefore, the yield of these bonds was 9%. This could serve as a valuable indicator for what someone engaging in a PE deal should anticipate paying on any debt finance.
Example of cost of acquisition finance
If we were do some investment analysis using some big high-level assumptions. A deal to purchase Company X which is making about £500,000 of EBITDA per year. This buyer is looking to buy the business for a 3-5X multiple. This would give Company X a purchase price of around £1.5m to £2.5m. For this example we say £2.0m
Assuming, the deal was funded with a £1.0m cash flow loan at 9% repayment, this would mean repayments equal 51% of EBITDA on a 5Y repayment loan or 78% on a 3-year repayment loan.
Challenges of raising acquisition finance
What makes these numbers interesting is that most loans have a condition that states the maximum loan repayment as a % of EBITDA is limited to 60%. Also most cashflow financing are for 3 years not 5 years.
However in our example above, that would mean the maximum acquisition finance the buyer can obtain is about £500,000. Therefore with the £1.0m in equity the maximum purchase price they can agree to would be about £1.5m or a 3X EBITDA multiple.
In conclusion, this is why raising finance for a company acquisition is very challenging and all tranches of funding such as invoice factoring and asset refinance must be looked at in conjunction with cashflow financing.
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