Banks and Leveraged Buyouts: Institutions Playing a Major Role in Deals
Newman, A. Joseph, Jr., American Banker
PHILADELPHIA -- Banking institutions are becoming increasingly important in leveraged buyout deals both as lenders and investors, speakers agreed at a recent one-day conference on leveraged buyouts at the University of Pennsylvania's Wharton School.
A leveraged buyout, or LBO, is the acquisition by a buyer of a company that is financed to a substantial degree with borrowed funds secured by the firm's assets or cash flow. The technique, which generally involves management of the company, is often used by corporations to spin off unwanted units or totake public companies private.
"A number of banks that have made a lot of money in this [leveraged buyout] business have begun to compete for LBOs," Leonard P. Shaykin, managing partner of Adler & Shaykin, a New York-based venture capital firm, told the conference last week. The Wharton Entrepreneurial Center sponsored the session.
Mr. Shaykin is a former vice president and director of the investment committee of Citicorp Venture Capital Ltd. and Citicorp Capital Investors Inc. His firm recently raised $125 million for a buyout fund.
Some banks, he said, "have even set up teams within their institutions to make these types of loans," bypassing normal lending formulas and credit approval processes.
The teams are "skilled in working with LBO firms," he said, and "they are very aggressive."
These bankers, Mr. Shaykin said, look for businesses "that are historically profitable, that have generated cash year after year -- businesses that will be able to sustain the considerable leverage that will be imposed upon them by the buying group without any surprises."
Leveraged buyouts are "good upon them by the buying group without any surprises."
Leveraged buyouts are "good businesses for banks," he said, because banks that finance the buyer often not only can acquire a new loan client for the bank at "attractive rates" but can add relationships in other areas as well, including cash management, pension management, and payroll handling.
Mr. Shaykin said banks that come "to appreciate this business would like to make a substantial term loan and revolving credit facility to the acquired company at a good and healthy spread."
His target in leveraged buyout ventures, he said, is a return of 10 to 20 times an investment in five to seven years. …