Target financing is a way of funding your private equity investment. It is often not the only method of fund-raising for an investment, but can be one of the most important tools for maximizing return potential. Although it has a higher cost to raise capital than other means, but it does have some upsides as well. What are they? Let’s find out!
Target financing involves raising one lump sum from a small number of investors who want to invest in a particular private equity vehicle that usually has been identified by the targeted company being acquired or invested in by that vehicle. Private equity funds generally have a minimum of $1 million or more to invest.
Uses of Target financing
(a) A public company that needs outside funding of some sort to pay off debt or provide funds to invest back into the company.
(b) A private company that needs outside investment to grow or invest back into the company.
(c) An individual who wants to invest a lot of money into one of the above, usually a company that is going public or going through an acquisition.
Normally, target financing is done on a different class of stock compared to what may eventually be issued by the targeted company. This allows the equity raise up front for the private equity fund and later on helps protect some sort of tax benefit for investors later on.
Who can adopt Target Financing?
Target financing can be used by both sellers and buyers in an acquisition. The benefit to the buyer is often that they get favorable terms on the financing of their acquisition, which can make a deal more likely to happen. The seller usually gets a higher premium on the sale of their company, since they are getting money upfront before other investment means come into play.
Sellers can get money quicker than if they were doing normal private equity transactions, which tend to take longer than 12 months. Incredibly, sometimes up to 18 months or more for a target company or entity that has significant private equity involvement. Usually it only takes up to 6 months for the deal to happen, even if it’s not ideal for both parties.
How is Target Financing carried out?
Target financing can be done in multiple ways. It can be done as a stand-alone investment via the investor buying shares directly from the targeted company or it can be done as part of a larger deal through an IPO. There are many variations on the deal, but the main thing is to find someone who will buy your company outright. That means no other investors are involved in it besides the potential buyer, which will help keep control in your hands.
Benefits of Target Financing
The benefit to the target company is that it reduces the cost of financing compared to other methods, which often involves banks. It also helps keep control in the good hands of management and not outside investors right away, which is often favored by management.
The benefit to the private equity fund is that it can get their money quicker than other types of investments, which can help them get other deals done faster. It also gives them some assurance that the deal will happen since they are getting an upfront payment for their investment. Target financing usually doesn’t involve too much due diligence either, unlike other methods where investors usually want a lot more information about what they are investing in up front before making a commitment.
Another upside is that target financing allows investors to take advantage of favorable terms since they are investing before other investment means come into play. The downside is that target financing tends to be more expensive than other methods of financing, even though it might seem like an attractive bargain at first.
The seller can get lump sum payments for target financing, but sometimes only in the form of warrants or options. The upside is that they can get money quicker than if they were doing normality tranprivate equsactions, which tend to take longer than 12 months. Incredibly, sometimes up to 18 months or more for a target company or entity that has significant private equity involvement. Usually it only takes up to 6 months for the deal to happen, even if it’s not ideal for both parties. The downside is that target financing tends to be expensive, even though it might seem like an attractive bargain at first.
Target financing also allows investors to take advantage of favorable terms since they are investing before other investment means come into play.