The management of a company does not usually have the money available to buy the business outright, and would first seek to borrow from a bank. However, management buyouts (MBOs) are seen as risky investments at the best of times and are even less likely to be approved in a financially challenging market.
This leaves private equity investors to fund the majority of a buyout in exchange for a slice of the company’s shares, although the managers are also required to inject some personal wealth, to prove their commitment to the business.
“MBOs are normally funded through debt and equity, with debt provided by the banks and equity provided by the institutions backing the buyers. But managers must put their hands in their pockets to stump up some equity,” says Tom Whelan, private equity partner at Lovells.
In 2007, Kenmore funded the buyout of serviced offices group Avanta, and provided additional equity and bank debt for a £100m (€108.9m) expansion programme. The deal, which was financed by Kenmore’s private equity arm, allowed the founder and chief executive of Avanta, David Alberto, to take control of the group.
In some instances, it is possible for the management and the original owner of the company to agree a deal whereby the seller finances the buyout, although this is relatively uncommon. The price paid at the time of sale is nominal; most of the cost is paid over the following years out of the profits of the company. The timescale for the payment is typically three to seven years.
The MBO of Lehman Brothers’ property fund management arm is thought to be structured in a similar way, with the managers – former Lehman Real Estate global head Mark Walsh and real estate fund management heads Brett Bossung and Mark Newman – agreeing to pay an initial $10m (€6.7m) for the business, followed by further instalments as profits flow back.
However, the transaction has not been smooth. Former European head Gerald Parkes, who left the company after May, is not part of the MBO despite participating in early negotiations. Limited partners in Lehman Brothers Real Estate Partners III are also thought to be disgruntled over valuations and management fees.
One source says: “When Lehman created a fund they often bought properties for the fund in advance of fund raising. In a rising market, this was great, but later, investors complained that these properties were put in at the wrong transfer pricing and they got stuffed.”
