One recent aftermarket trend that has been noted as a historical result of the poor credit market is the increase in "minority deals," according to the Capstone Financial Group.
Because many private equity groups are unable to secure financing for leveraged deals, purchasing minority interests in companies has become a more attractive option, states a recent report.
"If the investment turns promising, a strategic investor holding a minority interest is well positioned for an add-on acquisition," the report states.
“Minority deals have been around a long time, but they are much more prominent (now)," says Dan Smith, president of Capstone. Many firms specialized in minority deals in the past, he adds
And as many aftermarket companies are "riddled with debt," banks have been unreceptive to extending further credit, the Capstone report notes.
Another option for businesses facing financial uncertainty is a combination of debt and equity. Some deals use an equity "kicker," like preferred stock or warrants, which "provide the debt holder with the opportunity to invest in the business at a later date for a previously determined price," according to Capstone.
For example, an agreement could include an option for the debt holder to purchase 10 percent of the business for $5 million at the end of five years. If the business happens to double in value to $100 million in five years, the investor can exercise the warrant and get $10 million in value for $5 million.
Another result of this down economy is the decrease of "healthy" mergers & acquisitions — a trend that began about 18 months ago, says Graham Payne, Capstone's managing director. Luckily, signs of recovery are already being seen, and the recurrence of healthy M&A activity is again stabilizing.
