Taking private
Also written Take private · Take-private transaction · Going private
A buyout of a listed company by acquiring the shares held by the public — in India through SEBI's delisting process for promoters, or a Takeover Code open offer for an external acquirer.
In plain language
Most buyouts are of unlisted companies. Sometimes the target is listed, and the buyer has to acquire the shares held by the public so the company leaves the stock market. That is taking private.
Who does it, and how, depends on who is buying. In India it is common for promoters or controlling shareholders to take a company private through SEBI's designated delisting process. An external acquirer goes through the Takeover Code open offer process.
Private equity funds do it when they believe the market is valuing a company too low: buy it, delist it, fix it out of public view, and list it again later at a higher value.
How it works
Where it fits (Chapter 8, section 8.3). A buyout is the acquisition of a controlling stake — usually 51% or more — by one or more private equity investors, sometimes acting in concert (a club deal). Pure-play private equity subscribes to primary shares to provide growth capital and does not seek control; a buyout acquires secondary shares from existing shareholders to gain control. Taking private is the buyout of a listed company's public shareholding.
Why a fund takes a company private — the workbook's reasons for buyouts:
- Valuation asymmetry: a capital-starved company is an under-achiever, giving a control acquirer room for value arbitrage.
- Sub-optimal capital structure: too little debt keeps ROE below potential; adding debt can transform ROE and bring a tax set-off.
- Market undervaluation: acquire the listed company, delist it, build value and relist later at significant appreciation.
- Control of the exit: in owner-manager markets like India and Europe, minority investors face misaligned interests; control lets the fund steer growth and exit — including a sale to another buyout fund, a secondary buyout.
How it is financed. Often as a leveraged buyout: a classic LBO is financed 70% debt and 30% equity, through a special purpose acquisition vehicle that pools the debt and equity and gives lenders a ring-fenced, secured structure. Chapter 11 notes that through an LBO an investor can take a public company private.
The MBO route. In a management buyout of a listed company, the workbook's example has management holding 25% and the public the rest; management buys enough from the public to hold at least 51%. The MBO and taking private of Dell Inc. in the US is the workbook's classic example.
The obstacles. Buyouts require larger corpuses, concentrate risk and raise funding challenges, and they need a deep acquisitions market with targets available for sale.
A worked example
Shreeji Castings Ltd (illustrative) is listed with a market value of Rs 1,000 crore. Its promoter-managers own 25%. A private equity fund believes the stock is undervalued and backs management in a buyout.
How much must be bought? To reach the workbook's 51% control threshold, management and the fund must acquire at least 26% from the public.
| Line | Rs crore |
|---|---|
| 26% of Rs 1,000 crore, at the current market value | 260 |
| Debt at the classic 70% | 182 |
| Equity at the classic 30% | 78 |
In practice any premium paid to public shareholders raises the cost; the figures are at market value only to show the proportions.
The structure. The fund and management set up an acquisition company. The Rs 182 crore of debt is raised at that level from banks and bond investors; the Rs 78 crore of equity comes from the fund and management. The acquisition company acquires control of Shreeji, and Shreeji's cash flows are upstreamed as dividends to service the debt.
Taking it private. Because the buyers include the promoters, the public shareholding is acquired through SEBI's delisting process. Had the fund been an outside acquirer with no promoter role, the route would be a Takeover Code open offer.
The exit plan. Improve margins over five years and either relist or sell to another buyout fund in a secondary buyout.
Why NISM asks about it
Chapter 8 (Alternative Investment Fund Structuring), section 8.3 on buyout transactions defines taking private, club deals and secondary buyouts, with the MBO, LBO and MBI types in section 8.3.1; Chapter 2 and Chapter 11 (section 11.1.2) restate the buyout and LBO strategy and the MBO example. Expect a definition question on taking private, a question matching the Indian routes (delisting for promoters, open offer for external acquirers), and a question on the classic 70:30 LBO financing.
Common exam traps
- Promoters use delisting; an external acquirer uses the Takeover Code open offer. The workbook states them as two routes for two kinds of buyer.
- A buyout buys secondary shares for control; growth private equity buys primary shares without control.
- Control usually means 51% or more in the workbook's buyout description.
- A club deal is several private equity investors acting in concert — not a syndicate of small investors.
- A secondary buyout is an exit by sale to another buyout fund, not a second attempt at taking private.
- Classic LBO: 70% debt, 30% equity — some LBOs stretch beyond that.
- MBOs are infrequent in owner-manager landscapes such as India and Europe, and more common in the US.
Check yourself
1.What distinguishes a buyout from a pure play private equity transaction?
- a)Buyouts are only done in listed companies
- b)Private equity subscribes to primary shares and provides growth capital without seeking control; a buyout acquires secondary shares from controlling shareholders in order to obtain control, usually 51 per cent or more
- c)Private equity uses debt while buyouts use only equity
- d)Buyouts are exempt from the SEBI Takeover Code
Show the answer
Answer: (b) Private equity subscribes to primary shares and provides growth capital without seeking control; a buyout acquires secondary shares from controlling shareholders in order to obtain control, usually 51 per cent or more
The essential distinction between a buyout and a pure play private equity transaction may be explained by the difference in the type of shares that are the subject-matter of the transaction. Private equity is essentially about providing growth capital to an investee company; so the fund subscribes to primary shares in the company and provides financing. The primary intention of the investor is in making investment gains, therefore, private equity investors do not seek control on the investee company. On the other hand, a buyout is essentially about seeking control by acquiring secondary shares in the company from its controlling shareholders. Option (a) reverses the norm — it is customary to have privately held (unlisted) companies being subjected to buyout transactions, though a listed company may be bought out in a transaction called taking private. The simplest test: primary shares put money into the company; secondary shares put money into a seller's pocket.
2.A private equity fund is buying control of Sheth Castings, a promoter-run company. The incumbent management has no finance head and no operations head, so the fund assembles those executives from outside to complete the buyout team. What does the workbook call this variation of a buyout?
- a)A Management Buy-in (MBI) — a structure that emerges from the MBO when certain elements are missing from an incumbent management team and therefore have to be sought from outside
- b)A secondary buyout, because the management team is being changed
- c)A 'taking private' transaction, because a new team is taking charge
- d)A leveraged buyout, because any buyout that brings in outside executives must be financed mainly with debt
Show the answer
Answer: (a) A Management Buy-in (MBI) — a structure that emerges from the MBO when certain elements are missing from an incumbent management team and therefore have to be sought from outside
The workbook treats the MBI as an offshoot of the MBO: "A variation of the MBO is the MBI and may be caused more by circumstances than design wherein a management team may be assembled with the intention of doing a buyout either by a team of buyout specialists or acquirers. Due to this reason, MBIs are often considered as a structure that emerged from the MBO when certain elements are missing from an incumbent management team and will therefore have to be sought from outside." That is exactly the Sheth Castings situation.
Why the others are wrong:
- Secondary buyout is an exit route, not a management arrangement: exits are sometimes "achieved by selling off to another buyout fund (a process known as a 'secondary buyout')".
- Taking private is about who is bought out, not who runs the company: it is when "a listed company may also be bought out by acquiring the shares of the public shareholders". Sheth Castings is promoter-run and nothing says it is listed.
- LBO describes the financing ("a classic LBO is financed by 70% debt and 30% equity"), not where the management team comes from. An MBI may or may not be leveraged.
3.In which categories of companies can buyouts happen, and in which are they usually seen, according to the workbook?
- a)Mainly in early-stage companies, because venture capitalists prefer to take control of start-ups
- b)Only in listed companies, because control can be acquired only through the Takeover Code open offer process
- c)In theory, in early-stage, growth-oriented and established cash-cow companies alike, but they are seen more with growth-oriented and cash-cow companies, because buyouts are triggered by a target's future cash flow and valuation prospects
- d)Only in established cash-cow companies, because growth-oriented companies cannot be bought out
Show the answer
Answer: (c) In theory, in early-stage, growth-oriented and established cash-cow companies alike, but they are seen more with growth-oriented and cash-cow companies, because buyouts are triggered by a target's future cash flow and valuation prospects
The workbook says: "Theoretically, buyouts may happen in any of the three categories of companies – (a) Early stage, (b) growth-oriented companies and (c) established cash-cow companies. It is often noticed that buyouts are triggered by the future cash flow and valuation prospects of a target company. Therefore, they are seen more with companies falling under (b) or (c) categories."
Why the others are wrong:
- Early-stage gets it backwards. "Early stage investing is a different skill set as compared to steering later stage or established companies; therefore, venture capitalists usually prefer to remain in investment capacity without control."
- Only listed companies is wrong. "It is customary to have privately held (unlisted) companies being subjected to buyout transactions". Listed companies are only sometimes bought out ('taking private').
- Only cash-cows leaves out growth-oriented companies, which the workbook names alongside cash-cows as the usual buyout targets.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- TakeoverThe acquisition of substantial shares or voting rights in a company for the purpose of seeking management control — regulated for listed companies by the SEBI (SAST) Regulations, 2011.
- BuyoutA private equity transaction in which investors acquire a controlling interest — typically 51% or more of the share capital or voting rights — in a target company; with significant leverage, it is an LBO.
- Leveraged Buy-OutA control acquisition of a company financed substantially with borrowed money — a Private Equity buyout where the acquirer typically targets 51% or more of the target's share capital or voting rights.
- Secondary SaleAn AIF exit in which it sells its stake in a portfolio company to a third party — often another AIF, such as a later-stage PE fund taking over from a VC fund — rather than exiting through an IPO.
- Change of controlA change in who controls an AIF's sponsor or manager — majority board appointment or control of management for a company, or a 50% controlling interest otherwise — needing SEBI approval and an investor exit.
- Special purpose acquisition vehicleThe company incorporated for a leveraged buyout to pool the debt and equity capital and give the lenders a ring-fenced secured structure, sitting between the investors and the target.
- SyndicateA structure in which many smaller investors pool money in a special purpose vehicle to invest alongside a Lead Investor, who does the due diligence, commits own capital and charges a fee or carry.
- Management BuyoutA leveraged buyout in which the company's own management team borrows to buy a majority stake from existing shareholders and takes control of the business it already runs.
- Pre-IPO StrategyAn AIF mandate to subscribe to a company's shares before its IPO at a discount to the issue price, accepting the ICDR lock-in that runs from the date of listing.
- Club DealA buyout in which several private equity investors act in concert to acquire the controlling stake, because no one fund can or will write the whole cheque.
- Management Buy-inA buyout in which an outside management team is assembled to run the target, used where the company's existing managers cannot supply what a buyout needs.