How Private Equity can Leverage Sale-leasebacks to Generate Long-Term Value

The following column is from Tyler Swann, who is Executive Director, Investments for W. P. Carey, a GlobeSt.com Thought Leader. The views expressed are the author’s own.

Leveraged buyout activity continues to surge to highs not seen since before the financial crisis due to sustained low interest rates, access to cheap debt and record dry powder. Recent takeout bids – such as CD&R’s bid for UK supermarket chain Morrisons – have raised questions over how sale-leasebacks of real estate portfolios might be used as part of these transactions. Sale-leasebacks are often used by private equity firms to raise capital to support portfolio company growth. Through a sale-leaseback, private equity firms can unlock otherwise illiquid capital tied up in portfolio company real estate and reinvest the proceeds into its core business.

Here’s how private equity firms can leverage sale-leasebacks to generate long-term value:

Maximize portfolio company value by reinvesting sale-leaseback capital into its operations

Following the completion of a sale-leaseback, private equity firms can immediately invest the proceeds into its portfolio company’s business operations to support long-term growth. These include investments in new facilities, technology, equipment, R&D and human capital. The benefit of pursuing a sale-leaseback instead of other debt alternatives is that PE firms can realize 100% fair market value for the portfolio company real estate.

Earlier this year, W. P. Carey worked with a middle-market private equity firm on the $19 million sale-leaseback of two industrial facilities leased to a global distributor of plastics. The private equity firm used the transaction proceeds to secure long-term capital to expand portfolio company operations and fund future growth initiatives.

Pay down existing debt and provide portfolio companies with balance sheet flexibility

Private equity firms can use sale-leasebacks as a method to recapitalize and strengthen the credit metrics of their portfolio companies. Particularly for smaller, non-credit-rated companies that cannot access the capital markets, a sale-leaseback is a great tool to provide balance sheet flexibility and enable portfolio companies to pay down maturing debt and other liabilities. By improving the balance sheet, private equity firms can position a portfolio company for a credit upgrade or even an IPO, maximizing the long-term value of the company.

In 2020, W. P. Carey provided a private equity firm $40 million in sale-leaseback financing for a manufacturing facility leased to a global leader in barbecue grills and accessories. Proceeds were used to pay down debt and improve the balance sheet, helping position the company for a positive credit improvement. Shortly after the sale-leaseback, the company completed an IPO raising over $250 million.

Compete more effectively for new acquisitions and M&A

Sale-leasebacks can be used by private equity firms to help finance add-on acquisitions – where a PE firm acquires a new company and mergers it with an existing portfolio company to generate growth. By carving out real estate from a business during or post-acquisition, private equity firms can unlock substantially higher value for the real estate due to the spread between the lower cash flow multiple paid to acquire the business and the much higher cash flow multiple received from the sale of the real estate itself. As a result, sale-leasebacks are a capital-efficient way to maximize portfolio company growth while also serving as a positive arbitrage opportunity for private equity firms.

Last year, W. P. Carey worked with a private equity firm on the $29 million sale-leaseback of four industrial facilities leased to a global manufacturer and distributor of vehicle-mounted aerial lifts. Proceeds from the transaction were used to partially fund the manufacturer’s acquisition of a German company in the same industry, enabling them to expand their market share in Europe.

Conclusion

Sale-leasebacks are a highly attractive capital allocation tool with many strategic and financial benefits for sponsored companies. Real estate financing can be an extremely effective way to fund growth and add value to portfolio companies.

The current market environment also makes now an ideal time for private equity firms to consider a sale-leaseback of portfolio company real estate. High real estate prices due to strong investor demand coupled with low interest rates means PE firms can get a premium for commercial real estate assets, making sale-leasebacks perhaps an even more attractive financing strategy than traditional bank loans. In order to maximize proceeds, PE firms considering a portfolio company sale-leaseback should work with an all-equity buyer with experience working with all types of credits.

W. P. Carey has partnered with private equity firms and their advisors on these types of transactions since 1973, and has provided over $4.4 billion in capital to PE firms and their portfolio companies. If you’re interested in pursuing a portfolio company sale-leaseback, please contact us at globalinvestments@wpcarey.com.