Private Equity and the Shift in LBO Structures

In 2024, several notable LBOs highlight current trends and adaptations in financing structures given rising interest rates, high demand for private credit, and strong capital flow into sectors like technology and education.

The LBO we are looking at today is the acquisition of PowerSchool.

This is just a highlight of the transaction.

1. Bain Capital’s Acquisition of PowerSchool (June 2024)

• Deal Size: $5.6 billion
• Sector: Education Technology
• Structure: This deal was significant as it leveraged Bain’s emphasis on equity to navigate rising borrowing costs and secure favorable terms. Bain structured the acquisition with a blend of senior and subordinated debt, supported by a strong equity base. PowerSchool’s predictable revenue from SaaS subscriptions in the education sector helped secure the financing.
• Operational Strategy: Bain aims to expand PowerSchool’s suite of digital learning tools and analytics by enhancing product innovation and expanding its market share across schools globally, particularly targeting underserved regions. This move aligns with the educational technology sector’s growth trajectory, aiming to improve recurring revenue streams before an eventual public offering or sale

2. Increased Use of Junior Capital and Private Credit

• Many private equity firms are increasingly using junior capital structures and Payment-In-Kind (PIK) notes to balance cash flow requirements and interest rate fluctuations in recent LBOs. By incorporating PIK notes, companies can defer interest payments, enhancing their flexibility during periods of high-rate volatility.
• Private Credit: Private credit remains pivotal in financing these deals, with lenders tailoring bespoke financing packages that bypass the syndicated loan market. These credit solutions allow firms to maintain confidentiality and offer tailored terms that cater to specific sector needs, such as technology and healthcare, where cash flow can fluctuate significantly

3. Diversification of Debt Types and Lower Leverage Ratios

• Across multiple LBOs in 2024, private equity firms are mitigating risk by diversifying their financing structures, combining traditional senior loans with high-yield bonds and mezzanine debt. For instance, in high-growth sectors like software, firms are structuring deals with more conservative leverage ratios (below historical norms), which reduces dependency on short-term cash flow and eases debt-servicing pressure during market downturns

There are definite strategic shifts in LBO financing. Firms are adapting to economic conditions by favoring higher equity contributions and more diversified debt to create flexibility and resilience, even as they pursue aggressive growth and transformation strategies across their portfolios.

This reflects a broader trend in private equity towards conservative risk management, yet with a focus on capturing long-term sectoral growth.

P.S. Leave a comment or send me a message so we can discuss these ideas and what you have also been seeing in the financial landscape around us.

#mergers #privateequity #privatecredit #raisingcapital