Private equity firms across global markets, including those with significant Indian investments, are confronting a challenging dilemma. The traditional pathway for exiting investments through initial public offerings (IPOs) has been gradually reopening, but remains insufficient for complete cash-outs. Meanwhile, alternative methods involving balance sheet borrowing risk alienating equity investors further.
The Verisure Breakthrough: A New Model Emerges
Hellman & Friedman has pioneered an innovative solution last month that could transform how private equity firms manage exits. The firm successfully reduced its stake in security company Verisure Plc through an IPO while simultaneously raising €1 billion for payouts. The breakthrough came from issuing debt through a special-purpose vehicle that operates independently from Verisure's balance sheet.
According to capital markets partner Jonathan Parry from White & Case, "Private equity firms are having to be more creative about generating returns upfront. We're not at a stage where owners can sell large chunks of their holding at IPO."
Beyond Margin Loans: The PIK Advantage
While margin loans have been previously utilized for dividend payments, H&F's approach stands out due to its use of payment-in-kind (PIK) debt at the holding company level against a minority stake. This structure includes no repayment triggers, providing greater flexibility than traditional margin loans that allow banks to demand repayment under specific conditions.
Alex Robb, a finance partner at Ropes & Gray, notes "We are certainly seeing PE sponsors seeking to get creative to take advantage of what are extremely frothy equity markets." He anticipates fewer margin loan cases and more customized leverage solutions at holding company levels.
Strategic Implications for Future Deals
The innovative approach delivers immediate cash to H&F while positioning the firm for larger future returns when market conditions improve for selling remaining shares. This addresses a critical industry challenge where stock investors have become wary of private equity-backed companies burdened with excessive debt.
In the Verisure transaction, H&F and other shareholders sold approximately €492 million worth of shares, primarily through the IPO's overallotment option. The subsequent PIK note sale occurred through Aegis Lux 1A, an entity holding H&F's Verisure position.
Leverage finance expert Sabrina Fox confirms "So long as there is appetite for deals like this, raising PIK on a company stake for the purpose of taking it out as a dividend, then there is scope to see more going forward. Credit markets are hotting up and there is scope for innovation."
The transaction formed part of a comprehensive strategy to reduce Verisure's leverage ratio from approximately 4.7 to around 3, with targets to reach 2.5 by end-2026. This deleveraging makes the company more attractive to public market investors and supports ambitions for investment-grade rating achievement.
