Takeout Financing
How Private Equity Can Leverage Sale-leasebacks
Sale-leasebacks are often used by private equity firms to raise capital to support portfolio company growth. Through a sale-leaseback, private equity firms can unlock otherwise illiquid capital tied up in portfolio company real estate and reinvest the proceeds into its core business. Here’s how private equity firms can leverage sale-leasebacks to generate long-term value: Maximize portfolio company value by reinvesting sale-leaseback capital into its operations Following the completion of a sale-leaseback, private equity firms can immediately invest the proceeds into its portfolio company’s business operations to support long-term growth. These include investments in new facilities, technology, equipment, R&D and human capital. The benefit of pursuing a sale-leaseback instead of other debt alternatives is that PE firms can realize 100% fair market value for the portfolio company real estate. For example, W. P. Carey worked with a middle-market private equity firm on the $19 million sale-leaseback of two industrial facilities leased to a global distributor of plastics. The private equity firm used the transaction proceeds to secure long-term capital to expand portfolio company operations and fund future growth initiatives. Pay down existing debt and provide portfolio companies with balance sheet flexibility Private equity firms can use sale-leasebacks as a method to recapitalize and strengthen the credit metrics of their portfolio companies. Particularly for smaller, non-credit-rated companies that cannot access the capital markets, a sale-leaseback is a great tool to provide balance sheet flexibility and enable portfolio companies to pay down maturing debt and other liabilities. By improving the balance sheet, private equity firms can position a portfolio company for a credit upgrade or even an IPO, maximizing the long-term value of the company. In 2020, W. P. Carey provided a private equity firm $40 million in sale-leaseback financing for a manufacturing facility leased to a global leader in barbecue grills and accessories. Proceeds were used to pay down debt and improve the balance sheet, helping position the company for a positive credit improvement. Shortly after the sale-leaseback, the company completed an IPO raising over $250 million. Compete more effectively for new acquisitions and M&A Sale-leasebacks can be used by private equity firms to help finance add-on acquisitions – where a PE firm acquires a new company and mergers it with an existing portfolio company to generate growth. By carving out real estate from a business during or post-acquisition, private equity firms can unlock substantially higher value for the real estate due to the spread between the lower cash flow multiple paid to acquire the business and the much higher cash flow multiple received from the sale of the real estate itself. As a result, sale-leasebacks are a capital-efficient way to maximize portfolio company growth while also serving as a positive arbitrage opportunity for private equity firms. W. P. Carey worked with a private equity firm on the $29 million sale-leaseback of four industrial facilities leased to a global manufacturer and distributor of vehicle-mounted aerial lifts. Proceeds from the transaction were used to partially fund the manufacturer’s acquisition of a German company in the same industry, enabling them to expand their market share in Europe. Conclusion Sale-leasebacks are a highly attractive capital allocation tool with many strategic and financial benefits for sponsored companies. Real estate financing can be an extremely effective way to fund growth and add value to portfolio companies, particularly in today's high-interest rate environment. In order to maximize proceeds, PE firms considering a portfolio company sale-leaseback should work with an all-equity buyer with experience working with all types of credits. W. P. Carey has partnered with private equity firms and their advisors on these types of transactions since 1973, and has provided over $5.7 billion in capital to PE firms and their portfolio companies. If you’re interested in pursuing a portfolio company sale-leaseback, please contact us at globalinvestments@wpcarey.com.
Sale-leasebacks Have Become a Critical Tool for PE Firms. Here’s Why.
Growing PE Fund Sizes 2019 first quarter middle market private equity deal activity slowed compared to 2018, with declines in public markets and the government shutdown creating adverse pricing for PE backed IPO exits. Despite decreased deal volume and exit values, fundraising figures remained steady in the quarter, boosting dry powder available for new investments. Strong investor demand led PE firms and sponsors to grow the scale of their funds, with vehicles between $1 billion and $5 billion accounting for over three-quarters of capital raised. In fact, the average PE fund in 2019 has raised 70% more compared to the whole of 2018, demonstrating the substantial increase in fund size, based on data compiled by Pitchbook. Elevated Deal Multiples Multiples on new deals have remained elevated, fueled by the swelling dry powder base. The challenge for PE fund managers is to be competitive on securing new investments while meeting investor return expectations. Consequently, dividend recaps and add-ons have become more common as GPs endeavor to boost returns in the current elevated pricing environment. Increased Deal Sizes and Longer Holding Periods Along with larger funds, deals have grown in size and complexity, and longer holding times for investments are becoming more prevalent. Traditionally PE portfolio companies have been held for three to five years before being exited. Fewer than 50% of middle market exits occur in under five years, with the median holding time currently at 6.8 years. The top 25% of exits are hovering around a decade. As a result, there are increasing numbers of long-dated funds with investment periods extending to 15 years or more. Sale-leasebacks: An Innovative Capital Source to Mitigate Risk and Increase IRR To mitigate the risk of larger deal sizes, higher multiples, longer holding periods and uncertainty around longer-term interest rates, many GPs are turning to sale-leasebacks as a critical component of the capital stack. Because land and buildings tend to sell at higher valuations than the company itself, PE firms can sell a portfolio company real estate asset and rent it back under a long-term lease, thereby capturing a multiple arbitrage and blending down the initial purchase price multiple. Post-acquisition, a sale-leaseback can create liquidity, allowing an earlier return of cash to investors, thereby boosting IRRs. Conclusion In the current environment a sale-leaseback can effectively decrease acquisition multiples and allow PE firms to be more competitive in bidding for new acquisitions. A well-structured sale-leaseback with an experienced capital partner like W. P. Carey provides PE firm portfolio companies with access to an efficient, alternative and flexible source of long-term capital. In addition to helping PE firms achieve targeted investor returns, W. P. Carey works with its tenants on an ongoing basis to support their longer-term operating objectives through follow-on projects including expansions, building upgrades and build-to-suit funding for new facilities. W. P. Carey’s net lease portfolio comprises diverse property types and a range of asset classes in 31 industries and 25 countries, enabling us to work with a wide range of companies.