Benefits Of Recapitalization For Owners

Fund future growth—Growth, achieved organically or through acquisitions, requires capital; and fast growing companies can often outpace their ability to borrow through their usual channels. A minority recapitalization can help extend a company’s borrowing ability for sustained growth.

Business owners should work with experienced advisors who can help them determine the feasibility of a recapitalization, and identify the landscape of appropriate partners for the transaction. The recapitalized portfolio was spun into a joint venture, in which Brookfield is the majority owner. At Marquette, we’ve found many benefits in keeping the same asset and rotating its investment partners.

Reasons For Recapitalization

Thus, the company will get rid of some interest payments, reduce its risk exposure, and improve its overall financial health. During a leveraged buyout, the acquiring company’s balance sheet is loaded with additional debt used to purchase the target company.

With the new investment, the business can pay down $4 million of the debt, and would therefore have to refinance just $5 million at year end. The business owner would retain professional help to solicit interest from prospective investors. If the business were to increase its borrowing from $2 million to $7 million, then the retiring shareholders could take the extra $5 million out of the business as a dividend, reducing the equity value from $10 million to $5 million. These example sentences are selected automatically from various online news sources to reflect current usage of the word ‘recapitalize.’ Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors.

Definition Of Recapitalize

Through a recapitalization led by Nicole Agnew of Goldman Sachs and Brennan, the company bought out Coke’s stake last year. In 2020, industry sources estimated cost for a Mackinaw recapitalization was $162 million, while the Department of Homeland Services estimated that a copy of the Mackinaw would cost $350 million. While America is eager to address a range of maritime security challenges, France is at the early stages of an aircraft carrier recapitalization program. Free Financial Modeling Guide A Complete Guide to Financial Modeling This resource is designed to be the best free guide to financial modeling! A hostile takeover is the acquisition of one company by another without approval from the target company’s management. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Investopedia does not include all offers available in the marketplace.

Issuing debt in order to buy back the shares increases the debt-to-equity ratio in the capital structure. While funds used to pay dividends are taxable, the interest payments of debts are tax deductible. Another method of restructuring is the equity recapitalization process. This recapitalization process helps to reduce the debt-to-equity ratio of a company. A higher debt-to-equity ratio puts an extra burden on a company’s finances, as a company needs to pay interest on its debt securities. The high debt-to-equity ratio also increases the risk level of a company and makes it less lucrative to the investor.

Discover Insights From Your Company’s Data

You do not need to rely on existing financing sources—A minority recapitalization broadens your financing options and will provide more capital than simply relying on existing cash/liquidity and senior debt capacity. With so much of their wealth tied up in their companies, owners need to consider all options when envisioning their long-term goals. Many business owners find themselves in need of liquidity, but not necessarily ready to sell their company and relinquish control. The COVID-19 crisis will emerge as a catalyst in real estate, for GP-led transactions rather than for LP stakes, she said. GP-led transactions aren’t new, but until now, most of them involved recapitalizations of so-called tail-end funds, those at the end of their lives that held a few assets that needed to be sold, she explained.

• It may be done to protect an institution or company that is considered to be important for the country’s economy from insolvency and liquidity.
• Recapitalizations often allow a business owner to reduce the amount of wealth he or she has at stake by selling a portion of the company to an outside investment firm or private equity group.
• The advisor would assemble an offering document which describes the business, details the proposed use of the $4 million investment, and solicits proposals.
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• A well-structured minority recapitalization can provide the much-needed infusion of capital where and when companies need it most.

Under a 15-year tax credit plan, Boston Financial planned to exit the investment in November 2013. So instead of selling, we negotiated a price with Boston Finanical six months before the exit deadline, secured new debt through a Federal Housing Administration loan and paid back Boston Financial with these FHA funds. Facilitate the transition—When owners decide to step back from the business to transition to a new generation, management or ESOP, a prudent and patient capital structure that works for a diverse set of interests is required. Keep both hands on the wheel—Because liquidity does not come at the price of majority ownership, funding for shareholder consolidation or capital spending does not come at the expense of operational or cultural control.

If that sounds appealing to you, feel free to reach out as Marquette is now seeking more investors to bring into its existing portfolio, which includes the management of 11,000 residential units throughout the Midwest, Texas and Denver. Let us walk you through the process of selling part of your business while you still maintain a portion of the equity. Our team is incredibly experienced at structuring transactions to meet the needs of the seller. We offer solid business valuation services which are imperative to a successful recapitalization. Recapitalizations can release business owners from carrying personal guarantees on the company’s debts. Gain a long-term partner—Typically, minority recapitalizations are facilitated by buy-and-hold investors who are able to partner with a company for the long term.

Optimal Use Of Financial Leverage In A Corporate Capital Structure

Others received government assistance to remain afloat and need to recapitalize quickly. Converted from early-1960s-vintage C-135 transports, the 17 RC-135s are special not only for their age, but also for their importance—and for the absence of any clear plan to recapitalize them. All of the aforementioned projects contribute to recapitalization of the nation’s aging nuclear force, as do upgrades of the B-52 bomber and space initiatives. Inflation, which could effectively rip the guts out of this recapitalization project before it really gets started, was dismissed. The Structured Query Language comprises several different data types that allow it to store different types of information… Excel Shortcuts PC Mac List of Excel Shortcuts Excel shortcuts – It may seem slower at first if you’re used to the mouse, but it’s worth the investment to take the time and…

The financial crisis, for example, resulted in investors using limited partnership interest sales for portfolio management and for liquidity, Ms. Schwarzschild said. Assuming the investors value the business at 6x EBITDA, the total value of the business would be $18 million. The pre-money equity value would be equal to $9 million (which is the $18 million less the debt outstanding). The investor would therefore be investing $4 million of the $13 million “post-money” value, for 30.7% of the stock. The management team and investor then invests $3 million, which now buys 60% of the stock. In total, the retiring shareholders receive $8 million from the recapitalization. At $10 million, the management team or investor group would need to come up with $1 million just to buy 10% of the stock.

By gaining access to growth capital and expertise these owners can continue to move their business forward. These transactions enable leadership to continue in a management role and benefit from future growth of the business. Once a company reaches the upper threshold of its market share, it may explore launching new products or services in different markets to further promote continued growth.

Recapitalization For Growth

We would be happy to discuss how a minority recapitalization could work for you. There were $1.04 billion in real estate GP-led recapitalizations in 2020, from $1.29 billion in 2019. “Increasingly managers and investors are understanding high-quality portfolios are difficult to assemble or access, difficult to replace, and continue to gain value over periods longer than three to five years,” Mr. Kohn said.

A recapitalization can satisfy the additional funding needed while bringing an experienced capital provider and operating partner into the mix, who can offer business owners strategic professional advice on new routes and better management practices. Leveraged recapitalizations have a similar structure to that employed in leveraged buyouts , to the extent that they significantly increase financial leverage. Shareholders are less likely to be impacted by leveraged recapitalizations as compared to new stock issuances because issuing new stocks can dilute the value of existing shares, while borrowing money does not. For this reason, leveraged recapitalizations are looked upon more favorably by shareholders.

Corporate Takeover Defense: A Shareholder’s Perspective

If the management team paired up with an investor could come up with $3 million, the retiring shareholders would receive $3 million in cash for 30% of the business. Recapitalization can be used as a strategy to prevent a hostile takeover by another company. The management of the target company may issue additional debt to make the company less attractive to potential acquirers. Commonly, nationalization is sometimes used by governments for the sole purpose of taking over the assets of a large, very profitable private company – usually a foreign company with substantial business operations within the country. Leveraged recapitalizations differ from leveraged dividend recapitalizations. In dividend recapitalizations, the capital structure remains unchanged because only a special dividend is paid.

Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors. “NorthBridge wanted to raise a third fund and they needed a liquidity event and to print the track record,” give their investors an opportunity to cash out the investment or allow them to invest in the third fund, Mr. Reilly said. At the same time, the recapitalization market has matured with increased liquidity and transparency, he said. The new partnership will recapitalize a portfolio of buildings with 5,416 beds, according to a statement Friday. A lock-up option is a stock option offered by a target company in a takeover battle to a white knight for some of the company’s shares or best assets. Boston Financial met its return parameters, and Marquette was able to refinance it and keep the property in its portfolio. With FHA as the new lender, we are now adding value to the HighPoint – Serenity apartment complex by painting the buildings, resurfacing the parking lots and installing new hardwood flooring, appliances and countertops.

What Is Leveraged Recapitalization?

The restructuring can be done by altering the debt-equity ratio of the company. For example, bonds can replace the preferred shares during this restructuring.

In an equity recapitalization, a company issues new equity shares in order to raise money to be used to buy back debt securities. The move can benefit companies that have a high debt-to-equity ratio. A high debt-to-equity ratio puts an additional burden on a company, as it must pay interest on its debt securities.

For instance, the start-up of a multifamily project often attracts opportunistic funds looking for a high return; they’re willing to take a risk by either building something new or turning around an existing property. Once this asset is performing, opportunistic investors are usually ready to cash out and reinvest in another venture. Through recapitalization, they can achieve their return parameters often quicker and easier than putting the property on the market. Financial partners are most interested in capitalizing on their investments, meaning they look for companies that have the potential for future growth, whether organically or through acquisitions and consolidations.

The recapitalization process actually saves everyone time and money by eliminating marketing costs, legal fees, brokerage fees and real estate transfer taxes. It takes a little more trust and third party verification, but there are no startup delays for the new investment venture. It is customizable—The reasons a shareholder or business might need additional liquidity are as varied as the owners and businesses themselves. A minority recapitalization can be tailored to fit unique requirements and to meet a range of liquidity objectives. Owners can pursue multiple recapitalization strategies at once and design a transaction with different financial partners.

The First Known Use Of Recapitalization Was

If cash is found to fully recapitalize the aging Coast Guard Yard, both the Navy and the Coast Guard will win. During tough moments, including a successful effort in 1998 to recapitalize the company, Dovenberg could become somber or stressed, Radke said. The bill enlists the power of the Defense Production Act to, in part, fully fund and accelerate an ongoing 20-year, $21 billion recapitalization of the U.S.

At this stage in the pandemic, Brookfield executives are seeing more deals along the lines of what NorthBridge did, he said. Both new managers and more mature managers are leading recapitalizations for this reason, she said. Managers like the strategy because the seller usually keeps a small interest in the portfolio and also is retained to continue managing the portfolio. Now, although the recent rally has enabled the company to issue new stock and recapitalize its balance sheet, reducing some risk for shareholders, there are cheaper ways to play the fuel cell market. Nationalization is a special type of equity recapitalization where the domestic government buys a sufficient number of the company’s shares to obtain a controlling interest.