Equity Kickers: Pushing Your Deal Across the Finish Line

Private equity is often sold to funds and investors that specialize in direct investments in private companies or that engage in leveraged buyouts (LBOs) of public companies. In an LBO transaction, a company receives a loan from a private equity firm to fund the acquisition of a division of another company. Cash flows or the assets of the company being acquired usually secure the loan. Mezzanine debt is a private loan, usually provided by a commercial bank or a mezzanine venture capital firm. Mezzanine transactions often involve a mix of debt and equity in a subordinated loan or warrants, common stock, or preferred stock. Equity kickers are typically used with LBOs, MBOs, and equity recapitalizations.

  1. Bridging the gap between buyer and seller can be difficult, particularly when the gulf is wide.
  2. Generally, an EK gives you the option to buy shares of the debt issuer.
  3. Retained earnings grow larger over time as the company continues to reinvest a portion of its income.
  4. The lender can obtain an equity kicker from a minimum of 10% to a maximum of 80%, depending on the risk of the investment.
  5. Subordinated lenders expect to receive a higher return for assuming higher risk.

Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. The company is very capable, I would recommend Assets America to any company requiring commercial financing.

Equity Definition: What it is, How It Works and How to Calculate It

So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement. In this day and age, it’s especially rare and wonderful to work with a person who actually does what he says he will do. We recommend them to anyone needing any type of commercial real estate transaction and we further highly recommend them for any type of commercial financing. They were diligent and forthright on both accounts and brought our deal to a successful closing.

Sam has $75,000 worth of equity in the home or $175,000 (asset total) – $100,000 (liability total). It can obtain 400,000 euros internally with the resources generated by the activity itself. On the other hand, the company plans to waive 10% of capital for every 100,000 euros borrowed from investors. The terms of the loan’s kicker dictate whether you should agree to the EK or not.

When a warrant is in-the-money, its strike price is below the price or value of the shares. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. A real estate equity warrant frequently grants a lender equity in a real estate project. In addition, mezzanine and subordinated lenders use kickers to compensate for the increased risk of lending to certain companies.

Three investors, A, B, and C, want to help finance Company X’s expansion. This means A will receive an equity kicker of 2.5%, while B and C will each get 6.25%. In addition, it can raise $200,000 internally from its retained earnings. Company X plans to give up 5% equity for every $100,000 loaned by investors. The goal of a kicker is to solidify a deal that may not otherwise be realized without offering additional benefits to the lender.

How Is Equity Calculated?

Those factors include consumers’ awareness of a brand, if consumers are loyal to that brand, the associations they have with the brand, and the quality of the brand’s products or services. But in the world of business, it has to do with the difference after subtracting liabilities from assets. There is also such a thing as negative brand equity, which is when people will pay more for a generic or store-brand product than they will for a particular brand name. Negative brand equity is rare and can occur because of bad publicity, such as a product recall or a disaster. The house has a current market value of $175,000, and the mortgage owed totals $100,000.

All of the money that investors contribute to the fund is then distributed into a variety of investments that are made on behalf of the entire fund. These are generally long-term investments that can take upwards of 10 years to pay out. Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholder equity. Because shareholder equity is equal to a company’s assets minus its debt, ROE could be considered the return on net assets. ROE is considered a measure of how effectively management uses a company’s assets to create profits. Investing in commercial real estate also offers a number of tax benefits.

Are there alternatives to Equity Kickers in financing arrangements?

The equity ownership that is part of the deal can be utilized when a liquidity event occurs in the future. The equity kicker may be structured in such a way that the lender receives a percentage of the gross rental income generated by the property if it exceeds a certain pre-agreed amount. It may also be dependent on a future event such as the sale of the property, where the lender will get a percentage of the sale proceeds dependent on the amount of their equity in the company. As equity holders, they benefit from regular dividend payouts when the firm’s financial results are published, as well as a percentage of earnings that is proportionate to their equity ownership percentage.

They offer a kicker as a way to attract investors who would otherwise not be interested in lending to the company. Subordinated lenders expect to receive a higher return for assuming higher risk. This higher return will come in the form of a higher interest rate and the receipt of an equity kicker. Equity kickers could be for as little as 10% or as much as 80% ownership in the company’s equity depending on the overall risk that the lender perceives. Equity kickers are usually triggered by the sale of the business or some other monetization event. In real estate, a kicker is a separate component or agreement granting a lender equity in a real estate project or a share of property income.

How does an equity kicker work in commercial real estate?

You must be careful using real estate with this type of EK, as it is illegal in some jurisdictions. It gives investors a security that we equity kicker call a “right” and is similar to a warrant. The right allows you to buy shares at a specified discount on a specified execution date.

Examples of liquidity events include initial public offerings (IPOs) and mergers and acquisitions (M&A). In effect, a kicker is an extra incentive to encourage investors to purchase debt securities, such as a bond or preferred share. When a bond has an embedded option that may be exercised by the bondholder to purchase equity at the issuing firm at a discount price, the option is said to be a kicker. An investor will be incentivized to purchase a bond with a kicker as this allows the investor to participate in any increase in the value of equity ownership. When a borrower attaches an equity incentive to the terms of debt advanced by lenders, the incentive is referred to as a kicker.

Divestopedia Explains Equity Kicker

In return for loaning money to the company, the lender will receive a stake in the company and a certain percentage of future profits. Companies that offer an equity kicker embedded option are mostly unable to access credit from traditional lenders. Lenders typically lend to companies with adequate cash flows to service the loan, as well as enough of an asset base to act as security for the loan.

Investors typically look for companies with a solid financial record of steady sales growth and profits. Home equity is the appraised value of a home, minus what’s still owed on the mortgage. As a homeowner makes payments https://1investing.in/ toward the mortgage, the equity in the home builds. For example, many soft-drink lovers will reach for a Coke before buying a store-brand cola because they prefer the taste or are more familiar with the flavor.

You can also trade rights just like you trade shares up until the execution date. A convertible feature is a bond, preferred share, or other financial instrument that the holder can convert into stock. These types of securities are classified as a hybrid of debt and equity. As mentioned, mezzanine debt is a hybrid of traditional debt and equity. In mezzanine financing, the lender often has the right to convert the debt into an equity interest under predefined conditions, which may include factors beyond just default.

Leave a Comment

Your email address will not be published. Required fields are marked *

Open chat
Can We Help You ?