Came across this line in CFA curriculum material about LBOs: "Additional leverage is also gained by means of equity- like instruments at the acquisition vehicle level, which are frequently located in a favorable jurisdiction such as Luxembourg, the Channel Islands, Cayman Islands, or the British Virgin Islands"How do these equity-like instruments work exactly in relation to creating "leverage". The other associated sentences in the text haven't made me understand
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Can be anything from HoldCo PIK, to warrants, to convertible prefs. Quite an open ended question, not sure how helpful of an answer one can give if you don’t understand these debt instruments. They create additional leverage because the sponsor can turn to these options instead of writing a proportionally larger equity check. Assuming the debt is obtained at a cost which is lower than the sponsor’s required/desired equity return, it’s desirable for the sponsor. Obviously we’re assuming the issuer has the capacity to operate under this beefier debt pile. Can try to give a more comprehensive answer if you have a more specific questions.
Okay, I getv the idea mow. What's pik
Payment in kind notes.
Typically rolling up interest. Very common in UK PE.
Private equity ordinary equity is structured with a mix of ordinary shares and loan notes. The loan notes attract an interest rate (say 10.0%) and roll-up (a bit like non-amortising bank debt or credit fund debt). This becomes out preferred return because it ranks ahead of ordinary equity, but below bank / credit fund debt.
And what exactly do you think the phrase "at the acquisition vehicle level" means?
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