The meaning of the term “non-sponsored transaction” has undergone much change over the years as the mezzanine market servicing such deals has evolved. Originally, a non-sponsored deal was simply a mezzanine transaction lacking a buyout fund sponsor. While the absence of a traditional buyout sponsor is still a common thread connecting all such transactions, there are an expanding variety of non-sponsored transaction types and investment structures. The following are brief descriptions of some of the more prevalent deal types. One should bear in mind that these transactions are not always consummated in isolation. When a deal has multiple objectives, its structure may be a hybrid of more than one transaction type.
Recapitalization. A “recap” is a catch-all term for transactions in which the company’s balance sheet is being meaningfully restructured, generally to better match the assets and liabilities of the company or to provide liquidity for some special purpose. This usually includes resetting all credit facilities, often replacing existing lenders with new ones. In a recap, a mezzanine provider usually provides a tranche of subordinated debt and quite often a round of equity, either preferred or common, to augment the company’s capital base.
Independent Sponsor Deal. On the surface, an independent sponsor transaction may seem incongruous with a non-sponsored mezzanine investor; however, such deals represent arguably the largest market segment for non-sponsored mezzanine providers, and were among the earliest deals targeted and completed by Peninsula Capital Partners. Independent sponsor deals are transactions originated by an individual or group that does not manage a pool of capital, which is why such deals were formally referred to within the industry as “fund-less sponsor deals”. In these deals, a mezzanine capital provider partners with the independent sponsor to provide the subordinated debt and required preferred and/or common equity to complete the transaction, acting either as a control or non-control investor, depending upon the level of equity capital the independent sponsor invests.
Management Buyout. An “MBO” is a transaction in which the target company’s management team acquires a larger or controlling interest in their company, typically rolling over whatever current ownership interest they have as their “investment” in the deal. In such transactions, the mezzanine provider typically invests a round of subordinated debt plus a round of either preferred or common equity as needed. Generally, management achieves a controlling interest in such deals, or in lieu of that, a clear path to gain control via achieving certain performance goals.
Special Dividend. A special dividend, or leveraged dividend, is a one-time distribution to the common equity holders financed by a round of mezzanine capital, most often subordinated debt. The purpose of such transactions is to provide liquidity to the company’s owners by taking advantage of the business’ unused debt capacity and the tax benefits of leverage.
Stock Buyback. A stock buyback is the complete or partial repurchase of one or more equity holders using leverage, usually subordinated debt, to fund the transaction. Typically these repurchases do not result in a change of control, but on occasion will result in more than a 50% change of ownership. If the capital needed to repurchase all the desired equity is in excess of the company’s reasonable borrowing capacity, the mezzanine capital provider may also invest a round of preferred or common equity alongside the sub debt tranche.
Strategic Acquisition. A strategic acquisition is the purchase of a business, division, product line or facility by a company to expand its competitive footprint. A mezzanine provider in these deals provides the capital to complete the purchase, which may be all subordinated debt or equity or a combination thereof, depending upon the funding requirement and the other financial resources of the acquirer.
Growth Capital. As the name suggests, a growth capital investment is funding to support a company’s expansion plans, such as building a facility, buying equipment, launching a new business initiative and/or augmenting working capital to support expected revenue growth. As the goal of such transactions is to augment the company’s capital base, a mezzanine investor typically will structure their investment to preserve cash as necessary for proper execution of the business plan, which may requires an all equity investment or a combination sub debt and equity structure.