Sources and uses of funds at the entry of an LBO deal help us organize what funds the company has, what interest rates it needs to pay but also what fees it will have We start with the uses of funds and the major use of funds is the equity purchase price But if we're refinancing net debt, that's another use of funds A third use of funds are fees, we could have an advisory fees and financing fees, particularly debt financing fees Once we've worked out our total uses of funds, we can then calculate the sources for those same funds And major items here are going to be debt financing and equity from private equity funds We know that the uses must equal the source If we look at the table at the bottom of the page, we can see examples here On the left hand side in the uses we can the acquisition equity value, which is the purchase price We can see refinanced net debt, debt financing fees and advisory fees and it all adds up to 12,529.8 In the middle we can see the sources and we can see a number of debt items here Revolver, term loan A B, a mezzanine loan or a PIK note (paid in kind) and senior unsecured notes Once added to the equity that adds up to the same amount, your total sources of funds 12,529.8 Where will we get these figures from? Well our uses of funds will come from assumptions And our debt financing fees is an assumption driven by capital markets but we'll source that from banks and public debt markets It will also consist of multiple tranches as we can see in the table at the bottom of the page So once we've worked out the total uses of funds and you've worked out your debt financing Your equity financing is your use of funds minus the debt raised i.e. it has a plug figure You might split that into ordinary shares and preference shares or shareholder alone To go into the sources of funds in a bit more detail, we have here a debt structure This is a very comprehensive debt structure And all debt structures will be different and a particular debt tranche might or might not be present in a structure If we look at term A, B and C, this were all ranked equally in a liquidation However, assuming the company doesn't go into liquidation, they'll pay out at different times Term A is typically amortizing and will pay out over the shortest period, for instance 6 years Term B will then pay out over a longer period as a bullet repayment, for instance 7 years And term C another bullet over a longer period 8 years The interest rate charged on each of these will be progressively higher 2nd lien then ranks below the term A, B and C and again will command a higher interest still Mezzanine debt has a higher interest rate but this will have some kind of equity participation built into it For instance it could be convertible debt or it could be debt with warrant attached Thereafter we get to high use yield notes and these are your highest interest rate paying debt items We then go onto preference equity and then your common equity In terms of how much will provided by each of these, we typically expect to see 50-55% being provided from debt And 35-50% coming from equity Now the term structure pricing and amount of each tranche are variable And they will depend on the market and cash flow profile of the business In order to make it clear, who gets paid, when and how much? Clear transparent loan documentation is key