This is Part 3 of my series of Blog Posts where I try to dissect the nomenclature behind the different types of Equity Investors using the Six Minute Strategist Methodology.
In this post, I conclude by looking at Special Situations and Structured Investors.
Special Situations
This group of investors tend to be more active in their management approach and have an appetite for taking on existing problems. The strategy is very simple; find a business in difficulty, take control inexpensively, sort out the problems and create high returns. The problems are often more than just shortage of capital.
Secondary Purchase: these deals are not by definition necessarily in difficulty but refer simply to an acquisition by one institutional investor of a company owned by another. Secondary deals are regarded as a category in their own right as some investors will not do secondary deals. Often, an investor has had ownership for a number of years, his fund is maturing and he needs to find an exit. For the acquiror there may still be considerable further upside. These deals are often good for management teams who are able to make some money at exit and then have another roll of the dice with the new investor.
Distressed: Speaks for its self. These investors are actively seeking companies in trouble and will often acquire them from the receiver, enabling them to walk away from many of the problems which brought the company to its knees. These investors tend to be very hands on and will take an aggressive line with under performing management teams.
Turnaround: The implication for these deals is that the company is in decline rather than on the critical list. Often new management and a new strategy accompany additional capital. This is still a high risk business if you pick the wrong opportunity.
Special Situations: This descriptor is a catch all and is used by PE houses to indicate their appetite for a wide range of unusual circumstances. These may be capital related but just as likely there may be a problem with management, shareownership or even some litigation related issue.
Rescue: This type of investor is similar to the distressed investor. They are after the ambulance cases where urgent intervention (and normally a capital injection) are required to keep the business out of the hands of the receivers.
Mezzanine: This investor really straddles this category and the Structured Category below. Mezzanine capital is a form of capital with a lower return than equity but a higher return than debt. Often the instruments are structured with a high interest rate, some of which might roll up and only be paid on exit. They often are accompanied with warrants which give a small slice of the equity to the investor to enhance his return – often referred to as a kicker. Returns are normally structured to be in the high teens with the mezzanine ranking ahead of the equity but behind the bank debt.
Structured
This category does have some overlap but is distinct in the sense that the deals have a particular structuring component to them.
MBO/MBI/Buyouts: Mangement Buy-Outs and Management Buy-Ins can also include a combination of the two known as a BIMBO (Buy-in Mangement Buy-Out). Here the managment team are the deal drivers and they are supported by the new investors to buy the business. These deals often involve a significant equity sweetner for the management team who are normally expected to put some money into the deal (upto small multiples of their gross salary) but if the deal goes well they can earn very considerable sums. Careful financial structuring and complex shareholder agreements are the norm here.
Institutional Buyout: This is another term for an MBO or MBI except that the emphasis is on the provider of capital rather than the management team. In these deals the encumbent management may be of less significance if the investor already owns a business similar to that acquired which has its own team.
Public to Private: This type of deal is the reverse of an IPO. The company is already listed on a stock market and for a wide range of reasons, which might be purely financial and opportunistic, the investors combine with some or all of the management to buy its from its existing shareholders and delist the company.
Pre-IPO: This type of deal is often combined with category below. A company is close (normally within 18 months of an IPO) and this is the last institutional round prior to going public. The investor normally expects to acquire his shares at a significant discount to the expected IPO price. It is normal however for them to be locked in for a period immediately following the IPO.
Bridge Finance: These investors provide capital in advance of another anticipated capital event. This can be done with debt or mezzanine or a convertible instrument. The terms are normally quite rich as the companies are often in need of a quick capital injection and have to pay up.
Refinance: This final category can be quite complex and has some overlap with the Special Situations Category. If a deal needs to be refinanced, something has gone wrong and the existing investors can expect to take a bath. There is another variant on this play when things go well. In this case, the company has paid back its leverage and once again has a strong balance sheet. The existing investors will releverage the balance sheet and pay a dividend to the holders of the existing equity instruments. The pay outs can often depend on the structure of the shareholdings, the classes of equity and their respective rights.
Bonus Post
I will publish a Bonus Post in this series which draws this series together in the Six Minute Strategist Nested Hexagon of all these investor classes. You might find this a useful graphic for reviewing the series.
Six Minute Strategist Start Up Course – Is this for you?
Are you struggling to get your Start-Up Started?
Do you need to learn more about Business and Financial Plans
Do you need to learn how to pitch to investors?
Take a look at my brief Video…
[leadplayer_vid id=”51138B43EBE4B”]
Now go and check out the Course at https://jbdcolley.com/startup
