In the South African market, numerous local commercial and investment banks are key players in arranging and underwriting acquisition finance. Acquisition finance is raising money to fund mergers and acquisitions. The primary avenues for acquisition financing are equity finance and debt finance. Companies may also use their existing cash reserves.
The exact structure of the financing arrangements will depend on the purchaser, creditors involved and the target group.
Debt finance typically involves providing funds directly to a newly formed company or acquisition vehicle (commonly known as a Special Purpose Vehicle or SPV) to acquire the target company.
Bridge facility loans are prevalent in South African acquisition finance, serving as short-term finance to facilitate the completion of acquisition transactions. These loans, typically lasting up to 12 months, are refinanced shortly after the implementation of the acquisition transaction, often through senior long-term debt or redeemable preference shares.
In South Africa, redeemable preference share funding is popular among acquisition funders due to favorable tax treatment.
Senior debt may also be extended to the target company for refinancing existing debt and meeting working capital needs.
Understanding the nuances of these financing options is important in understanding the landscape of acquisition finance in South Africa.
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