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BRIDGE EQUITY
By: W. Michael Bond and David Herman
What is Bridge Equity? Bridge Equity is a financing
technique that allows potential acquirers of companies or
assets to commit to an acquisition before the equity necessary
for such acquisition is raised. By obtaining a Bridge Equity
commitment from a capital source, the acquirer can proceed
with a quick commitment, even though the ultimate equity
investors may not be located for a substantial period of time.
In essence, the Bridge Equity commitment obligates the
capital source to provide the required equity to the acquirer
and then locate syndication investors who are willing to
acquire such equity. Thus, the capital source bears the risk
that the syndication cannot be completed.
Advantages to Acquirers:
A.
B.
C.
E.
Syndication:
1.
2.
3.
F.
Loss of promote
Loss of fees
Loss of control or decision making
rights
Loss of control or influence of
syndication process
G.
Transfer Rights.
The acquirer would
typically be prohibited from transferring its
direct or indirect ownership interest until the
syndication is complete.
H.
Non-Governmental
Plans
(Not
eligible for Fractions Rule). These
investors will typically be concerned
with unrelated business taxable income
(UBTI) and can generally avoid
UBTI by owning their interest through
a blocker corporation or a REIT. A
REIT is a much more tax efficient tax
3.
Governmental
Plans.
These
investors will often take the position
that they are not subject to U.S. federal
income tax but if given a choice many
would prefer to invest through a REIT
to avoid any risk of incurring tax or
UBTI.
J.
K.
Foreign Investors
1.
M.
Summary
Bridge Equity was developed as a natural
response to market conditions that required investors to move
quickly in order to be in a position to outbid rival potential
acquirers. It also provided capital sources with product to
distribute to syndication investors. While there are myriad
issues that must be solved in order to properly align the
incentives of acquirers and capital sources and to make the
investment attractive to a panoply of potential syndication
investors, the advantages of this product are apparent. How
this product will continue to evolve in light of over charging
market conditions will be important to all of the constituent
parties to these transactions.