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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

In a management buy-out (MBO) of a subsidiary, which feature most typically distinguishes the financing structure from that of an ordinary quoted company?

An MBO is typically financed with a high proportion of borrowing, including senior and mezzanine debt, alongside equity from a private equity investor. Managers hold a small stake because they lack the capital to fund the purchase themselves.

  1. AA high proportion of debt and mezzanine finance, with private equity taking an equity stakeCorrect
  2. BMainly financed by a public rights issue to existing parent shareholders
  3. CFinanced entirely by retained profits of the subsidiary
  4. DFinanced by a bonus issue of shares to managers
  5. Financed mainly by government grants

Explanation

Managers rarely have enough capital to buy the business. MBOs are therefore typically highly geared, using senior debt, mezzanine and a private equity investor's equity, with managers holding a small but incentivised stake. A bonus issue raises no cash and retained profits cannot fund the purchase.

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