In the highly competitive field of private equity, balancing portfolio companies’ opportunities for growth investments with limited equity resources when executing the strategy is a key challenge. Minimizing ongoing investment needs while enabling growth is a fundamental driver of IRR.
BTI was approached by a Private Equity firm trying to change the way tools were purchased by one of their portfolio companies. The challenge was that the company purchased tools from its suppliers and carried them on its balance sheet while performing the necessary calibrations and set-up procedures before it was put into production and started to generate cash flow. The capex required reduced cash flow available for debt service (CFADS) and utilized capacity in the capex ‘bucket’ agreed with its creditors, making it necessary for the Private Equity firm to consider funding new purchases with equity.
In addition, large parts of the tooling development took place in development centers located within the plants of the portfolio company. BTI’s secondary goal was to utilize these development centers to lower the tax burden on the group.
To achieve both these objectives BTI used an Irish entity that subcontracted the design of the tools to the customer’s development centres and ordered the finished designs from a tool shop that was the customer’s list of approved vendors.
Upon delivery of the tool, BTI allowed the customer to inspect and test the tools but retained them on our balance sheet up to the point where the operation started, in total about one year.
BTI engaged a third-party tax advisor to structure a solution where BTI was able to pay the design centres for the design of the tools in a BEPS compliant way. Having held the tools for such a substantial amount of time, we could utilize the low Irish tax rate to yield additional benefits for the customer.
Overcoming the challenges
of international logistics and warehousing
Taking advantage of bulk
buying benefits without increasing working capital