Posted In: Business Transactions & Corporate Counseling & Mergers, Acquisitions and Divestitures
By Molly Z. Brown on March 24, 2022
In this blog mini-series, we continue our dialogue exploring liquidity events and strategies for optimization with Cascade Partners’ Director, Arjun Murthy. Arjun brings a wealth of experience in corporate finance, mergers and acquisitions, and financial operations. He also brings experience completing a diverse group of capital, debt, equity and hybrid securities for clients.
In our last dialogue, we discussed options for liquidity events. For this edition, let’s move towards planning for liquidity events and implementing strategies for ensuring marketability.
Molly: In planning and preparing clients for liquidity events, what corporate governance and capital structure steps are you seeing companies implement to achieve better marketability?
Arjun: Planning, planning, planning. We cannot stress enough that private and public companies with capital and liquidity roadmaps are best positioned to take advantage of opportunities in the markets and obtain capital at strategic times before changes in the market occur. In addition to capital allocation plans, corporate governance actions such as implementing a board of directors and having a “true” CFO with a full understanding of the numbers will provide investors with confidence in a company and increase the likelihood of a successful outcome.
Molly: Since clients with a capital and liquidity roadmap in place are typically best positioned to take advantage of opportunities from investors, what is the ideal timetable for planning, preparing, and completing a private capital raise for clients?
Arjun: That is an excellent question with, unfortunately no “off the shelf” answer. Depending on the situation, we’d prefer to proactively conduct a capital raise rather than react to a situation that’s triggered an immediate need. When it comes to the objective, lead times to prepare can differ. For example, is the company seeking a majority recapitalization to transition ownership or take a majority of its chips off the table, or do we need to raise capital for growth and/or working capital? The first situation certainly requires a longer lead time; ideally, the “right” team (investment bankers, counsel, accountants) is secured 6 – 12 months ahead of time. Why such a long lead time? Our objective is to understand the business and the shareholders’ objectives intimately. We want to assess if it makes sense to establish other measures that can create value (e.g., conducting a small acquisition, changing a key management position, etc.). Most advisors do not take this approach, but in our experience these actions can significantly enhance value, but create a longer lead time. In reality, things don’t always pan out as planned, and we’d like to be in a position to really understand the company and objectives as soon as feasible.
Molly: When establishing term sheets for debt offerings, what structure considerations and terms are you seeing investors regularly seek?
Primary considerations we routinely see are level of equity received (common, preferred or both), guarantees, financial covenants, advisory or board roles/seats, convertibility features for debt to equity, and drag along and tag along provisions for minority investors. These are all critical terms that directly impact the ownership and company, so it is crucial to have the right advisor in place to explain and negotiate these terms.
The timeline of the investment horizon has started to shift, and now depends on the type of capital provider. A traditional lender is likely to prefer a five-year term with a five- or seven-year amortization period, while a non-traditional lender will be open to a longer-term and amortization period. The primary objective of a debt provider is to seek a certain return on their debt investment, and often, once that return is achieved, they will seek to exit the investment leading to a recapitalization or liquidity event, depending on the structure.
Molly: Outside of the obvious corporate governance implications, what pros and cons do you see from having investors having a say in management?
Arjun: Both established and high-growth companies can benefit from the expertise, network and experience of institutional investors, such as private equity and family office investors, through board and advisory roles. It is well documented that diversity of thought in senior management, advisory boards, and board leadership in terms of expertise, communication and leadership styles, and race and gender, benefit companies’ bottom lines. When you bring on an investor, you will often give up certain flexibilities or open the door for other input that may previously not have existed. At Cascade, we assist our clients in finding the right investors to complement their needs and understand the pros and cons of bringing an investor on as part of the equation.
Molly: More and more we are seeing private companies working to avoid going public and becoming SEC reporters. This trend has had the effect of resulting in more sophisticated capital structures in place at private companies. Have you noticed this to be the case on your end as well?
Arjun: Yes, this is a trend that we see as well. As growth companies stabilize earnings and begin to return capital to investors, we see them interested in simplifying their capital structures and routinely partnering with securities attorneys, like Brouse McDowell, to achieve goals and keep on track with their capital and liquidity planning milestones. This is another reason why having a capital and liquidity plan in place is important.
Molly: Capital and liquidity planning for companies seeking to achieve a major liquidity event can establish targets to ensure better marketability in an eventual liquidity event. What steps do you take to ensure your clients achieve their strategic goals?
Arjun: Having the right capital structure in place can position the company to achieve its objectives, whether that’s allowing the company to grow without restraints, providing the company with enough liquidity and working capital to operate, or investing in the company for future growth. Proactively thinking about an exit or liquidity event by facilitating the company to be in the most attractive position possible is critical to maximizing value in a liquidity event. Certain milestones we assist our clients in thinking through are their growth goals, what they need to achieve those goals, and what their near-term and long-term objectives are. If they want to exit in the near-term, perhaps recapitalizing the company is not in their best interest, but if they have a longer-term horizon in which they can position the company to be a top-tier target, we collaboratively think through what a capital structure can look like, and who the right partner can be, both now and in the future.
Molly Brown is a securities and mergers and acquisitions attorney with Brouse McDowell LPA. She has counseled clients in connection with the raising of billions of dollars of capital through equity, debt, and hybrid securities offerings, for public and private companies and government-issued securities. Molly brings experience advising public and private companies on capitalization structures, investor relations, and corporate governance strategies designed to optimize marketability and economics for liquidity events. In addition to advising issuers of securities, she routinely advises financial institutions, registered investment advisers, broker-dealers and funds on maintaining regulatory compliance.
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