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What are the most important factors to consider when selecting a geography for an LBO?

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If you are a private equity (PE) investor looking to acquire a company using a leveraged buyout (LBO), you might wonder how to choose the best location for your target. An LBO is a transaction where you use a large amount of debt to finance the purchase of a business, hoping to generate high returns by improving its performance and selling it at a higher valuation. The geography of the deal can have a significant impact on its success or failure, depending on various factors. In this article, we will discuss some of the most important factors to consider when selecting a geography for an LBO.

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Brunilda Isaj

Chief Business Officer @NOA sh.a. | Secretary General @Albanian Microfinance Association | Business Development…
Amitabh Vatsya

Democratising Investing | IIM Mumbai

1 Market size and growth

One of the first things to look at is the size and growth potential of the market where the target company operates. You want to invest in a business that has a large and expanding customer base, as well as a strong competitive position. A larger market can offer more opportunities for revenue growth, margin improvement, and synergies with other portfolio companies. A growing market can also increase the exit value of the company, as buyers are willing to pay more for future cash flows.

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Brunilda Isaj

Chief Business Officer @NOA sh.a. | Secretary General @Albanian Microfinance Association | Business Development Executive | Financial Technology Promoter | Financial Inclusion and Education suporter
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Fully agree with this! However, in smaller markets such as Western Balkan countries, the view can also be extended on a regional level, as the recent policies are encouraging synergies and common trade areas, which can make individual smaller countries more attractive as well. Globalization trends and offering of remote services through digitalization are also impacting this view, and provide also some opportunities to smaller markets that however are experiencing growth and reflect potential.

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2 Regulatory and legal environment

Another factor to consider is the regulatory and legal environment of the geography where the target company is based. You want to avoid locations that have high barriers to entry, complex tax structures, or unstable political situations. These factors can increase the cost and risk of doing business, limit your operational flexibility, and reduce your exit options. You also want to be aware of the local laws and regulations that govern the LBO process, such as antitrust, labor, environmental, and disclosure rules. These can affect the feasibility, timing, and structure of the deal.

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3 Currency and exchange rate

A third factor to consider is the currency and exchange rate of the geography where the target company operates. You want to minimize the exposure to currency fluctuations, which can affect the profitability and valuation of the company. If the target company earns revenues and incurs costs in different currencies, you need to hedge the currency risk or factor it into your valuation. If the target company is located in a different currency zone than your fund, you need to consider the impact of exchange rate movements on your returns and exit value.

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4 Cultural and social factors

A fourth factor to consider is the cultural and social factors of the geography where the target company is located. You want to invest in a company that has a compatible culture and values with your fund, as well as a positive reputation and relationship with its stakeholders. Cultural and social factors can affect the communication, collaboration, and integration of the company with your fund and other portfolio companies. They can also influence the employee morale, customer loyalty, and social responsibility of the company.

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5 Availability and cost of capital

A fifth factor to consider is the availability and cost of capital in the geography where the target company is based. You want to access a deep and liquid market for debt and equity financing, as well as favorable interest rates and terms. The availability and cost of capital can affect the leverage ratio, capital structure, and interest coverage of the LBO. They can also determine the amount of equity you need to invest and the return you can expect from the deal.

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Amitabh Vatsya

Democratising Investing | IIM Mumbai
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I agree with it completely, as the cost of capital decides the size of LBO, so an economy which is growing very fast with low interest rate regime is a place to do LBOs, so one should avoid economies with inflation starting to rise, or historically have been a problem.

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6 Industry dynamics and trends

A sixth factor to consider is the industry dynamics and trends of the geography where the target company operates. You want to invest in a company that is in a mature, stable, or growing industry, with low cyclicality, high barriers to entry, and attractive margins. Industry dynamics and trends can affect the demand, supply, and pricing of the products or services offered by the company. They can also create opportunities or threats for innovation, consolidation, or disruption in the market.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the most important factors to consider when selecting a geography for an LBO?

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1 Market size and growth

2 Regulatory and legal environment

3 Currency and exchange rate

4 Cultural and social factors

5 Availability and cost of capital

6 Industry dynamics and trends

7 Here’s what else to consider

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