Question

1. Henry & Murdock LLC., is PE firm. Three years ago the firm acquired 60% stake in Kandles Inc., valuing it at a PPM of 5.5x. Today Henry and Murdock have agreed to sell their 60% stake to another PE firm at a PPM of 6.5x. Which of the following can be inferred based on this information?

1. Henry & Murdock is conducting a leveraged recapitalization of Kandles.
2. Henry & Murdock is profiting through multiple arbitrage.
3. Kandles is involved in a secondary buyout.

1. II only
2. II and III
3. I and II
4. I and III
5. I, II and III

Answer 1

Leveraged Recapitalization is a financial transaction in which a company changes its capitalization structure by replacing the majority of its equity with a package of debt securities having both senior bank debt and subordinated debt. And in the given case we did not find any of this happening, so we can rule out that Henry & Murdock is conducting a leveraged recapitalization of Kandles Inc.

Now, we see that Henry & Murdock is profiting by selling the stake to another PE firm, so point "II" will be one of the answers.

Secondary buyouts occur when private equity (PE) firms sell control of a portfolio company to another PE firm, which in this case is very clear.

So, the answer will be option B - II and III.