Loan Notes and Preference Shares play a crucial role in the capital structure of Private Equity (PE) backed portfolios
In the UK and Europe, Private Equity sponsors, along with any rollover management shareholders, typically invest a significant portion of initial capital (up to 95%) into Loan Notes and/or Preference Shares. These instruments often carry a fixed interest rate ranging from 8% to 12%, making them a substantial component of the overall return.
Terms and Structures of Loan Notes and Preference Shares
- Coupon Rates: Typically ranging between 8% – 12%
- Compounding Periods: Fixed Periods or based on issuance dates
- Day Count: 360/360 or Actual Days
- Interest Payments: Paid in Kind (PIK), cash, or both
- Rankings: Loan Notes will rank above Preference Shares; multiple classes of Loan Notes or Preference Shares with different rankings could exist.
- Variable Rates: Some instruments may have rates that change over time or vary for different investors, such as in cases where leavers retain their Loan Notes or Preference Shares, leading to a drop in coupon rates.
Impact of Events During the Holding Period
- Additional drawdowns for add-on acquisitions
- Return of principal, cash-paid interest, PIK waivers, etc.
- Changes in management team ownership (new joiners or leavers)
- Re-organizations or capital structure resets
- Underperformance (e.g., when EV is less than the total outstanding)
Tracking these events to maintain an up-to-date Loan Note and Preference Share Register, along with detailed interest schedules, can be very challenging and time-consuming.
Data Needs for Accounts and Tax
- Accurate records and documentation for event logs and interest calculations
- Disclosure of Loan Notes and Preference Shares as ‘Creditors’ on the balance sheet
- Calculation of tax benefits such as interest tax shield for the portfolio company
- Accurate calculations for withholding tax liability and for creditor’s tax returns
Importance of Accurate Valuations
- Quarterly Valuations: As Preference Shares and Loan Notes constitute a significant part of a fund’s holding in a portfolio company, they are crucial for quarterly valuation and reporting. Relying on multiple Excel files and manual calculations can be time-consuming and error-prone, especially given the complexity of managing many portfolio companies, each with its own unique capital structure.
- Portfolio Exits: During portfolio exits, producing accurate valuations for each Loan Note and Preference Share holder requires validation of historical and transaction logs. If done manually, this process can often take significant time cost during a transaction process.
At DealsPlus, our cap table management solution fully digitises and automates the tracking and valuation of Preference Shares and Loan Notes in PE-backed portfolio structures, saving significant time and cost for both fund and portfolio teams. Get in touch if you would like to learn more.