Capzanine

The board is made up of members external to the management company and advises in a consultative capacity on investment projects submitted by fund managers, who are responsible for the final investment decision in the light of such advice.
The Advisory Board may give its views on any conflicts of interest which may arise on the acquisition of a shareholding or on any event provided for in the fund's rules.

BIMBO (Buy In Management Buy-Out)

A leveraged buy-out (LBO) in which a group of internal managers acquires sufficient share capital to buy out the company from within while an external team of managers simultaneously buys in.

BOND REDEEMABLE IN SHARES

A bond redeemable only in shares on terms set at the time of issuance.

BONDS WITH SHARE WARRANT ATTACHED

Bonds to which share warrants are attached (cum warrant), entitling subscribers to future access to the company's equity on terms established at issuance of the bonds.
Bonds with share warrants attached are thus remunerated by the bond component (interest paid in cash or capitalised) and by access to the value created by the company, through exercise of the share warrants.
Subscribers are free to exercise the warrants or not as they see fit. Warrants may be detached from the bonds and traded or exercised at any time.

BREAKEVEN

The minimum level of revenue above which a company becomes profitable, depending on its cost structure (fixed costs/variable costs). Since the income and expense structure varies considerably from one sector to another, the breakeven point is highly relative.

BRIDGE FINANCING

Short term bank financing intended to be replaced rapidly by more permanent funding in the form of equity capital, mezzanine financing, senior debt financing or payment of a dividend by the newly-acquired company to the holding company which acquired it.

BUSINESS MODEL

The business model (not to be confused with the business plan) is an analysis of the business expertise and knowhow (sales, marketing, technological innovation, production, distribution channel management, purchasing, exploitation of trade marks or brand names) on which the company relies to create value.

BUSINESS PLAN

A written and quantified presentation for a business startup or development, summarising the objectives, assumptions, resources and investments required to attain the projected results within a given time horizon (generally 3 to 5 years). This is one of the main analytical tools available to an investor, who assesses its relevance in financial, commercial and strategic terms – and also assesses management's capacity to implement the plan successfully!

BUY-SELL PROVISION

A contractual clause guaranteeing investors liquidity on their investment by enabling significant shareholders, after a given period, to trigger the disposal of the company's entire equity capital. The other shareholder(s) have a preferential right to buy out the equity. If they choose not to exercise this right, they must then sell their stake.

CAPITAL INCREASE

A company may finance its development (investment, acquisitions, etc.) by bringing in new money from an equity investor (an existing shareholder or a new investor). This has the advantage of not increasing the company's debt. Existing shareholders' stakes are reduced, however. The alternative of mezzanine financing offers an optimum solution to both problems.

CARVE OUT

Process whereby an industrial group sells a division or assets, the perimeter of which has no corporate existence at the time of the sale.

CLOSING

This is the moment in the process of transferring ownership of the company when clauses governing the transfer of securities to the new owner are applied and hence the transfer of the company becomes effective.

CONDITIONS PRECEDENT

As part of an equity investment transaction, the signature of a memorandum of agreement or of final acquisition contracts is generally subject to conditions precedent, or prior conditions. The investment transaction only becomes final and effective on fulfilment of these conditions; otherwise, the buyer's undertaking to purchase and hence the seller's undertaking to sell are cancelled.
The nature of these conditions varies from one deal to another. They may stipulate the conclusions of an audit, a positive opinion from the Advisory Board, the granting of financing, the final draft of legal documentation regarding the investment, effective provision of supplementary financing (e.g. bank financing) or the renewal of a key contract.

CONVERTIBLE BONDS

Bonds issued by a company that entitle the holder either to be repaid the nominal value on maturity, or to convert the bond into shares in the company on terms and at a parity determined on issue.
Convertible bonds are a useful way for an investor to contribute to a company's equity without immediate or possibly even future dilution for existing shareholders.

CORPORATE GOVERNANCE

The term corporate governance is used to describe the functioning of the relation between the shareholder and senior management of a company, and principally the functioning of the Board of Directors or the Supervisory Board.
Its aim is to safeguard the interests of non-executive shareholders. Its principles establish the relations between executive directors (whether shareholders or otherwise) and non-executive shareholders. Key principles include: separation of the functions of Chairman and Chief Executive Officer, possible creation of independent audit or compensation committees, submission of directors' appointments to the vote of shareholders, establishment of interim financial statements by auditors, and transparency of stock option transactions.

COVENANTS

These are borrowers' undertakings to comply with certain financial ratios, defined when bank or mezzanine financing is made available, in the course of the LBO. The clause is included in mezzanine loan agreements and reduces shareholders' margin for manoeuvre by preventing them from engaging in certain deals without the prior approval of their lenders. If this clause is breached, the loans will be repayable immediately. The ratios may be renegotiated in the light of the company's business development and environment.

DATA-ROOM

A locale in which all the financial, legal and economic information concerning a company for sale is made available to potential buyers, in the strictest confidentiality. A virtual data room is accessible via the Internet.

DEAL FLOW

Flow of investment opportunities examined by the private equity investor.

DEVELOPMENT CAPITAL

Capital provided to finance an established company's development: launch of new products/services, international development, external growth, increased production capacity, opening of new sales outlets. The investor almost invariably remains a minority shareholder.

DILUTION

A reduction in a shareholder's percentage stake in a company's equity following a capital increase. Despite this percentage decrease, the value of the diluted shareholder's equity may remain unchanged. In this case, the dilution is said to be apparent.

DRAG-ALONG RIGHTS CLAUSE

This clause appears in the shareholders' agreement. It is associated with the right of joint exit and gives the majority shareholder the right to force a minority shareholder to participate in the sale of shares if an offer is made to buy out all the company's shares. The other shareholders are entitled to the same prices, terms and conditions as those offered to the majority shareholder. (See "tag-along clause").

DUE DILIGENCES

Prior to any deal, a potential investor interested in buying out or investing in the equity of a company will carry out an exhaustive investigation of the company's situation. This may extend to the accuracy and integrity of its accounts, any fiscal or legal risks, insurance cover, verifying assumptions made in the business plan, the robustness of the company's technological, marketing or sales positioning, environmental compliance, quality of the management team, etc. Due diligence is thus the full range of checks an investor makes to test assertions made in the business plan and to weigh the strengths, weaknesses, opportunities and threats presented by the investment. It is generally carried out by external experts at the request of the private equity fund.

EARN-OUT CLAUSE

A contractual clause providing for a supplementary payment to the sellers, to be paid by the buyer following the acquisition, dependent on the company's subsequent achievement of predetermined financial targets (e.g. net income, gross operating profit, operating income, etc.).

EBIT

Earning Before Interest and Tax

EBITDA

Earnings Before Interest Taxes, Depreciation and Amortizantion.
This is an intermediate accounting measure that excludes amortization and depreciation allowances and thus is not impacted by the investment and financing policy.

ENTERPRISE VALUE

The valuation placed on a company by investors, reflecting primarily its positioning, growth, profitability, future prospects, etc.
Enterprise value (EV) is generally expressed as a multiple of earnings (EBIT or EBITDA). To assess the value of company's equity, its net debt (Total debt less cash and cash equivalents) is deducted from its enterprise value.
To calculate the real price of a company's shares, its net debt (debt less cash and cash equivalents) is deducted from its enterprise value.

EQUITY

This term refers to the company's long-term resources (equity, share capital, mezzanine funding) as opposed to bank debt and other operating debt.

EXIT

A term referring to the sale of a shareholding by a private equity structure either through an IPO or by sale to another company (known as a trade sale) or to another private equity investor.

FISCAL INTEGRATION

Fiscal integration of a parent company and a subsidiary is possible in France as long as the parent company owns at least 95% of its subsidiary's capital. In this case, only the parent company is liable for tax and can offset losses by one subsidiary within the scope of integration against the profits of another, thereby making tax savings. When structuring an LBO, for example, it means that the interest on LBO debt is deductible from taxable earnings.

GOODWILL (on acquisition)

Goodwill is the positive difference between the net asset value of a company, as reported in its balance sheet, and the amount a buyer is willing to pay for the company. Goodwill therefore covers intangible elements such as the quality of its costumer's portofolio... and the reputation of a trade mark or brand.

HANDS ON / HANDS OFF

Terms used to describe two opposite approaches to investment policy. The investor adopting a hands-on approach becomes involved in the management of the company alongside management, being proactive but with no involvement in operations. A more passive investor adopts a hands-off approach, acting more like a sleeping partner.

HOLDING COMPANY (NEWCO)

As part of an LBO, an ad hoc holding company (known by the generic name of NewCo) is generally created to carry the various forms of financing needed to acquire the target company.
Any debt contracted will be covered by dividends paid by the target company to the holding company. If the holding company owns 95% or more of the target company in France, fiscal integration can be used to optimise the tax position of the consolidated entity.

INDEPENDENT FUND

An investment fund may be termed independent if the management company is majority-owned by the management team. In contrast to so-called captive funds, the funds under management generally come from a wide range of sources. Independent funds are not subject to potential conflicts of interest with a parent company and often benefit from faster decision-making and investment processes.

INFORMATION MEMORANDUM

A summary document describing a company, aimed at investment funds, setting out the information needed for potential investors to reach a decision (company background, description of its activity, products, market, organisation and resources, financial information and business plan, proposed investment opportunity, etc.

INTERNAL RATE OF RETURN (IRR)

The performance of an investment over a given period, expressed as an annual percentage return.

INVESTOR ADDED VALUE

This encompasses the range of services an equity investor is able to provide its affiliates, in addition to capital and financial structuring: advice on development strategy, overseas contacts, identification of partners or target companies for buy-out.

LBI / MBI (leveraged buy-in / management buy-in)

A financial structure that enables an external buyer to acquire a company with the backing of financial partners, using the principle of the LBO.

LBO/ MBO (leverage buy-out / management buy-out)

A financial structure for acquiring a company by financing only part of the acquisition cost through equity. The initial capital is supplemented by debt, used to provide leverage, to be repaid from future dividends paid by the target company. A further LBO subsequent to an initial LBO is known as a secondary LBO.

LBU (leveraged build-up)

An external growth policy pursued by a company bought out under an LBO.

LETTER OF INTENT

An undertaking between the seller and buyer, prior to the final agreement and often containing conditions precedent, laying down the outlines of the proposed transaction.

LEVERAGE

Leverage consists in financing part of the acquisition cost of a company through debt, in order to limit the use of equity and increase the return on capital employed (ROCE). Mezzanine funding, which partially replaces equity, can be used to optimise leverage, in addition to the classic lever represented by bank debt.

LOCK UP PERIOD

The period following an IPO during which an investor who has sold (or issued) shares is required not to sell or issue any new shares onto the market.

LOVE MONEY

Money invested by friends and relatives of the company owner, generally used to finance a company in its earliest stages (pre-startup and startup).

MEMORANDUM OF AGREEMENT

This document sets out the conditions on which an investor may invest in the equity of a company. It often takes the form of an undertaking to buy on the part of the investor or an undertaking to sell on the part of the seller, to be exercised within a certain period of time on precise financial terms. It is the formal statement of the practical terms of sale negotiated.

MEZZANINE

A hybrid form of financing between debt and equity, generally established through issuance of bonds with equity subscription warrants. Mezzanine financing makes it possible to participate in financing the acquisition or development of a company with limited recourse to equity and to bank debt. Mezzanine debt is remunerated by interest (paid in cash and/or capitalised) and by future access to the company's equity on exercise of warrants. It is repaid once senior debt is repaid in full, generally after 8 to 10 years.

NON-DISCLOSURE AGREEMENT (NDA)

Agreement signed at the outset of negotiations between the company and/or selling or financing agent and a potential buyer. It sets out the information contractually regarded as confidential and the requirements of confidentiality incumbent on each of the parties.

OPEN BID

The sell-off of a company orchestrated by an investment bank which invites a large number of potential buyers to bid for the company.

OWNER BUY-OUT (OBO)

A leveraged financing structure that enables a company director and majority shareholder to realise some of his assets while retaining a significant stake in the company's equity and in its future management.

PREFERENCE SHARES

Shares carrying certain advantages over ordinary shares. The most common advantage is access to preferred dividends. Only companies that have reported distributable profits over the past two financial years are eligible to issue preference shares.

PRICE/EARNINGS RATIO (P/E ratio, PER)

Expression of the value of a company's equity as a multiple of its net profit.

PRIVATE EQUITY

Private equity is the holding of a majority or minority stake in the capital of companies, generally unlisted, in order to finance the various stages in the life of a company (startup, development, transfer, turnaround, etc.) and thus participate in the creation of value associated with this financing.

PRO FORMA ACCOUNTS

Company accounts adjusted for non-recurrent items or changes in scope of consolidation, in order to arrive at accounts that can be compared on a consistent basis over several financial years.

PUBLIC TO PRIVATE (PtoP)

Term referring to the acquisition of a company and the subsequent delisting of its shares (public equity) by a private equity investor.

REPLACEMENT CAPITAL

Acquisition of minority stakes from a minority shareholder in companies offering no immediate or rapid prospect of withdrawal, but presenting long-term possibilities of revaluation and liquidity for the private equity investor.

REPRESENTATIONS AND WARRANTIES

A representations and warranties clause offers protection to the buyer by certifying that there are no hidden liabilities and that all the means of production are effectively under the company's control. In concrete terms, the seller gives certain assurances regarding the company in the form of undertakings as to the substance of the company being sold (the reality of its assets and the accuracy and integrity of its accounts). The seller also guarantees the shareholders' equity at a given date (that of the last known balance sheet attached to the agreement) and undertakes to reimburse the buyer for any reduction in that amount arising from an event occurring prior to the date of the last balance sheet or prior to the date of the transaction, for a given period and up to a predetermined ceiling. This clause is frequently accompanied by the withholding of a fraction of the purchase price or by a bank guarantee (known as a warranty guarantee).

RIGHT OF APPROVAL CLAUSE

A right of approval clause written into its articles of association enables a company to veto any new potential shareholder. This clause is frequently used by family firms or companies with fragile shareholder balances. Technically, the right of approval clause means that any shareholder must seek the company's approval before any sale of shares to a third party not already a shareholder.

RIGHT OF PRE-EMPTION CLAUSE

The right of pre-emption or pre-emptive right clause, similar in application to the right of approval clause, gives a category of shareholders or all shareholders a priority right to acquire any shares offered for sale. This clause reflects a desire by existing shareholders to increase their stake in the company or to control the capital structure.

SELLER'S NOTE

A loan made by the seller of a company to enable the buyer to pay part of the acquisition price in the future, on terms and conditions agreed with the seller. Unlike an earn-out clause, this payment is not dependent on the company achieving predetermined financial targets.

SENIOR DEBT

Medium term secured bank debt used to finance part of the purchase price of the company and, where necessary, to repay its existing debts. It may be amortisable (generally over 7 years) or bullet, i.e. repayable on maturity (repayment in fine) in 8 or more years.

SHAREHOLDERS' AGREEMENT

A legal document establishing the relations between the various shareholders in the company by introducing mechanisms designed primarily to control the distribution of the company's equity and its management rules (corporate governance in particular).

SHARE WARRANT

A security that allows the holder to subscribe to new shares on terms predetermined by shareholders. Generally, the warrant is attached to a bond or a share.

SHARES WITH WARRANTS ATTACHED

Shares accompanied by warrants which can be exercised by the shareholder to increase his stake in the equity. These may be used as incentives to management to create value, used by investors when acquiring equity stakes and may be exercised, after a certain qualifying period, subject to criteria such as results, investment performance or meeting the business plan.

SPIN-OFF

Process of selling off a subsidiary of a group, generally in order to refocus on the group's core business.

STATUTORY DIVIDEND

A company's articles of association stipulate the right for shareholders to receive a predetermined fraction of any profits.

STOCK OPTIONS

This mechanism, which is subject to legal and fiscal provisions, enables company employees, executives and directors gradually to acquire a shareholding in the company. They thus gain a stake in the performance and value creation of the company employing them.

SYNDICATION

Investment funds or banks may wish to share the total amount of financing required on a particular transaction with other sources of financing (equity, mezzanine or senior debt), in order to diversify the risk or in view of the scale of the sums involved. They come together to form a syndicate. The institution organising the syndication (financing structure, negotiation of investment terms, syndication to other investors or lenders) acts as lead manager or arranger.

TAG-ALONG (PIGGY BACK) CLAUSE

This is a clause in the shareholders' agreement which stipulates that if an investor wishes to sell his shareholding in the event of an offer of total or partial buy-out, another shareholder is entitled to participate in the transaction and sell his shares at the same price and on the same terms and conditions as the buy-out offer. (See "drag-along rights clause").

TRACK RECORD

The past performance of a company, manager or investor.

TURNAROUND

A company that has experienced financial difficulties is considered to be in turnaround when it once again becomes profitable by generating positive net cash flow and is able to meet any debt constraints, generally as a result of internal restructuring and possibly with the aid of a private equity investor.

TURNAROUND FINANCING/RECOVERY FINANCING

Financing the capital of companies experiencing difficulties for which corrective measures have been taken or identified.

VENDOR DUE DILIGENCE (VDD)

Due diligence performed directly by the seller, generally documenting all the information a buyer would require for its own due diligence procedures. The vendor is then in a position to ask potential buyers for firmer bids without the need for preliminary due diligence on their part.

VENTURE CAPITAL

Providing funding in the form of equity or equity equivalents to startups with potential for high growth but not as yet generating positive income or cash flow.

WORKING CAPITAL REQUIREMENTS (WCR)

This represents the cash flow needed to run the company. Working capital management, closely correlated to revenues, is therefore essential in properly controlling the cash flow requirements of an expanding company.
WCR is the difference between current assets and current liabilities using the formula: WCR = Inventory + Accounts receivable – Accounts payable.