Capital / Cash Management

Funding through private capital markets can help you reach your strategic goals without bringing in equity or new partners

private capital markets

Editor’s note: In this three-part series, we will focus on private capital markets as a funding option for growth and fueling long-term strategic planning. Then, we explore what private capital markets are and, later, how to build this kind of recapitalization into your strategic planning.

CEOs may pursue multiple avenues for growth and strengthening their company’s strategic position. Investing internally via capital expenditures (CAPEX) or making key hires may be appropriate for some companies, while others may find more attractive opportunities in acquisitions.

A business owner may have as a priority the diversification of their personal wealth so as not to be overly concentrated in the business.

Other business leaders may need to reorganize ownership of their companies. This could mean concentrating ownership through the buy-out of shareholders who no longer wish to participate in the company. It may also entail passing ownership to the next generation or an executive team or buying out ownership entirely.

These actions share a common denominator: the need for external capital. For a company to achieve its fullest potential, a CEO and their advisors need to understand how much capital is available to them, from whom and at what price. This is especially true if shareholders do not want to give up equity or bring in new partners.

Many CEOs hold a now obsolete view that commercial banks are the best, preferred and perhaps only source of non-equity capital for their companies.

Even trusted advisors such as attorneys and accountants can share this bias. And while commercial banks remain excellent sources for asset-based lending, they may not be able to provide cost-effective capital beyond what can be secured with tangible assets.

 

Funding alternatives abound for CEOs

The corporate landscape has evolved; a greater percentage of companies produce profits and cash flow uncorrelated with or disproportionate to their tangible assets.

Essentially, there has been a shift from manufacturing toward services. Companies that provide services, such as technology, distribution, marketing, light manufacturing, healthcare and others, do not require heavy investment in property, plant or equipment, or other physical assets.

CEOs of such companies may find that their trusted commercial bank cannot provide capital beyond the liquidation value of their tangible assets, totaling no more than 1x or 2x EBITDA, even though their business is highly profitable and has a track record of high quality of earnings.

Fortunately, the private capital markets have evolved and grown in recognition of this shift in the U.S. economy. In addition to commercial banks, debt capital can be sourced from a large and rapidly growing pool of institutional non-bank lenders.

Pension funds, insurance companies, business development companies, family offices, credit opportunity funds and hedge funds are among the capital providers in this market, which currently number over 6,000 participants providing over 50% of the private commercial credit in the United States.

These institutional entities are not bound by the same regulations as commercial banks, allowing them to lend against cash flow and quality of earnings, rather than the liquidation value of tangible assets.

A borrower’s EBITDA of $5 million is generally the minimum to attract this type of capital, with no upper limit. Types of financing range from senior secured all the way down the capital stack, and current market conditions provide borrowers access to senior debt of 1.75x to 5.5x EBITDA depending on the amount and stability of EBITDA. The amount of additional capital available to companies can be significant.

Raising capital for the right reasons

Regardless of the type of capital you wish to raise, it has to be in the context of a rational business strategy. If your focus is growth, how would having 2x-4x your current presumed funding capacity impact the company’s strategic plan?

Would that increased funding allow for more aggressive organic growth? Would it allow you to consider more significant acquisitions to fuel enhanced competitiveness, drive growth and increase the value of your business?

There are numerous situations where an owner would benefit from recapitalizing their business, but the limitations imposed by the false belief of needing to raise equity or sell their companies unduly narrow the array of perceived options.

For example: Imagine a CEO who is uncomfortable with having a disproportionate percentage of their personal wealth concentrated in their company. A recapitalization could be used to fund a dividend, allowing for the de-risking of their personal wealth portfolio. Another familiar situation is a desire to buy out partners or other shareholders who no longer wish to have their lives and financial risk tethered to a private company.

Common wisdom might suggest selling the company or bringing in a private equity investor, even if the CEO has no wish to sell or take on new partners. However, a debt recapitalization allows the buy-out of some or all such shareholders, concentrating ownership with the CEO and aligning shareholder interest while avoiding governance issues.

Knowing how much non-equity funding is available to your company may provide fuel to reach your strategic goals, and even recalibrate your vision. Whatever your funding requirements, business owners and CEOs should know that they have alternatives. If your commercial bank cannot meet your needs, the Private Capital Markets have the depth and flexibility to allow you to reach your goals without compromising control of your company: inevitable when you turn to outside equity or additional partners.

Securities Offered Through SPP Capital Partners, LLC, 550 Fifth Avenue, 12th Floor, New York, NY 10036, Member FINRA/SIPC

 

Related Resources 

Predictive analysis for your business: Cash-flow forecasting

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About the Author: Mark Taffet

Mark Taffet is CEO of Mast Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies. Mast Advisors provides capital raising services through an affiliation with SPP Capital Partners, a…

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