Key parties and documents in acquisition finance

The main parties to an acquisition finance transaction will usually include:

• • the sponsor, or, in some cases, sponsors — the sponsor will provide the equity often by way of ordinary shares and subordinated loans, into a special purpose holding entity (“Holdco”) and will normally acquire a controlling stake in the business;
• • management — management will normally subscribe for or be granted equity or equity rights in the group and will manage the business in accordance with the business plan;
• • finance parties — lenders and related parties such as the security trustee and facility agent which are the common roles of banks and other financial institutions. Lenders will provide the senior and, if applicable, mezzanine debt;
• • purchaser — the purchaser will normally be a special purpose vehicle (SPV) set up to purchase the target(s) and will often be the main borrower;
• • Holdco and other SPVs — the parent will typically be the SPV established above the purchaser where equity is invested and subordinated loans lent;
• • target and its subsidiaries (known as the target group) — the target group makes up the business (or group) that is being acquired; and
• • seller / vendor — the entity selling the target group.

The main documents for an acquisition finance fall into three categories:

• • acquisition documents — these govern the terms of the acquisition between the vendor and the purchaser. These documents may include the sale and purchase agreement and disclosure letter and will be negotiated between the sponsor and the vendor;
• • equity documents — these govern the terms of the equity investment (which may include shareholder subordinated debt) and the relationship between the investors. These documents may include a shareholders agreement/investment agreement, Holdco constitution and shareholder subordinated debt instrument and will be broadly determined by the controlling sponsor with some allowances for the views of participating management and the sponsor; and
• • finance documents — these govern the provision of the acquisition facilities and any related facilities (such as a revolving credit facility for working capital). These documents may include facilities agreements (senior and, if applicable, mezzanine), bond documentation, intercreditor agreements and security documentation and will be agreed to by the sponsor and relevant finance parties.

This guidance note further details each of the above key parties and documents and includes a structure diagram for a typical leveraged buy-out transaction.

See Key parties and documents in acquisition finance.