What is a Financial Buyer?
A Financial Buyer in M&A is defined as an acquirer that purchases a company as an investment to achieve a targeted return.
Unlike strategic acquirers, financial buyers are more returns-oriented and have near-term potential exit strategies in mind at purchase.
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What are the Characteristics of Financial Buyers in M&A?
Financial buyers are investors such as private equity firms that purchase companies primarily as investments to achieve a specific monetary return.
The most common type of buyer in an M&A transaction is a financial sponsor, e.g. a private equity firm (PE), which refer to investors that specialize in leveraged buyouts (LBOs).
Financial buyers, such as private equity firms or family offices, are investing on behalf of their fund’s limited partners (LPs), which provides the firm’s general partners (GPs) with the capital to deploy and generate positive returns.
Leveraged buyouts (LBOs) are transactions in which a significant portion of the purchase price is funded using debt – most often a 60% debt to 40% equity split.
Given the risk associated with LBOs, where a significant debt burden is placed on the acquired company, i.e. the portfolio company, PE firms must spend extensive time performing diligence on the company and its ability to handle the potential debt load.
Specifically, the portfolio company must meet periodic interest payments and repay the debt principal at maturity, or else the company would be in technical default.
If the company were to default, the PE firm will likely incur a significant loss in returns from the investment, which not only hurts the fund’s current returns but also its ability to raise capital for future funds due to the damage inflicted on the firm’s reputation.