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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

A management buy-out (MBO) is funded largely by debt and the buy-out team is financed through a venture capital firm. Which feature is most typical of the venture capital investor's structure in such a deal?

Venture capital in an MBO typically uses a mix of convertible preference shares and ordinary equity and plans an exit through flotation or sale within a few years. Investors seek monitoring rights, and management usually hold shares to align incentives.

  1. AThe use of convertible preferred shares and an equity stake with an exit planned within a few yearsCorrect
  2. BA permanent perpetual loan with no equity participation
  3. CAn absence of any monitoring or board representation
  4. DA requirement that management hold no shares in the new company

Explanation

Venture capital in MBOs commonly uses a mix of preference shares, convertibles and ordinary equity, and expects an exit (flotation or sale) in about 3-7 years. They usually seek board representation, and management normally hold equity to align incentives.

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