Capital / Cash Management

Private capital markets: A primer on raising funds without giving up equity

man and woman seated at a desk

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.

There are many reasons you may want to raise money for your company, among them:

  • Fund organic growth or strategic acquisitions
  • Provide a dividend to balance the concentration of wealth between your company and investments held as your portfolio
  • Allow for your “next generation” or management team to buy into the business for fair value
  • Provide an exit for a shareholder/partner who no longer wishes to be tied to your company

Your company is valuable and has a strong quality of earnings. Your bank doesn’t “see it” and is limiting capital availability to a percentage of asset coverage. They also want a personal guarantee.

Why can’t you obtain funding the way Private Equity players do?

You can, and without giving up equity ownership in your business. There is no magic or genius to it; just having someone to guide you through the process of raising money in the private capital markets.


More in this series

Part 1: Funding through capital markets can help you reach your strategic goals without bringing in new equity or partners

Part 3: Funding strategic acquisitions through private capital markets 

What are “Private Capital Markets”?

Many CEOs believe that commercial banks are the sole source of debt capital for their companies. This was never true and ignores an enormous shift in capital availability since the “Great Recession.”

Leading up to the Great Recession, commercial banks became aggressive in their lending practices. When those banks suffered massive losses in the recession, it threatened the national (and international) economy. As a U.S. taxpayer, you bailed out those banks. The expectation among such banks that they will be bailed out is called “Moral Hazard.”

As a result, regulations were placed on commercial banks to prevent another meltdown and discourage moral hazard. The Federal Reserve, the Office of the Comptroller of the Currency (“the “OCC”) and the FDIC established “Leverage Guidelines” that generally limited commercial banks’ capacity to lend (no more than 3X LTM EBITDA) and enforced higher fixed amortization rates (~10%-15% per annum). Lending limits for commercial banks are tied to the tangible assets a company can provide as collateral and/or personal guarantees.

For every action, there is a reaction. In this case, the reaction was the creation of several types of alternative “non-bank” institutional commercial lenders. This community of institutional lenders has more than reached critical mass. There are now over 6,000 such lenders that make up over 50% of the private debt capital available to corporate borrowers.

These lenders take various forms and include:

  • Insurance Companies
  • Pension Funds
  • Credit Opportunity Funds
  • Business Development Companies (“BDCs”)
  • Family Offices
  • Hedge Funds

Commercial banks vs. institutional alternative lenders

Fundamentally, raising capital from commercial banks and alternative lenders is identical. Risk/credit analysis is performed, and financings are accepted or rejected. The debt is “priced.” Due diligence is completed and loan documentation is put in place to close the deal.

The critical differences between commercial banks and alternative lenders involve the risk each can take on and the repayment terms they can offer. As a general proposition, non-bank lenders:

  • Tend to be more comfortable with “cash-flow” lending, and are not limited to “asset-based facilities” or other measures of the value of the borrower’s collateral
  • May be a little more expensive than commercial banks, but have:
    • Less stringent fixed amortization (1%-7% per annum)
    • Looser covenants
    • More generous leverage multiples — 2x-5.5x LTM EBITDA — depending on scale of profitability
    • No need for personal guarantees

The transaction process with an alternative institutional lender is quite similar to the way a bank approves a loan. They receive an offering memorandum, perform their credit review and engage counsel to document the deal. When professionally presented, the transaction process should take 8-12 weeks.

Accessing the market

Alternative institutional lenders generally require some minimum deal size to have interest in a transaction. $10 million as a minimum amount is generally a good rule of thumb. Accordingly, accessing the entire breadth of capital providers is for companies that are at least mid-sized: $5 million in EBITDA, with no upper limit. For companies that do not meet this threshold, commercial banks are probably the best debt capital source.

When approaching the private capital markets, all options should be explored; bank and non-bank lenders should be allowed to compete for your business. More than one structure for raising capital is usually available. These alternatives can be crafted to meet the very specific financial and commercial goals of you and your company.

Once you broaden the horizon of potential capital sources, it is important to determine the type of deal that is best for you. The types of debt capital that can be made available include:

  • Senior Revolving Credit Facilities
  • Second Lien Debt Facilities
  • Asset-Based Facilities
  • Terms Loans
  • Mezzanine Securities: Instruments that are “junior” or “subordinate” to senior debt
  • “Unitranche” Facilities: All senior facilities that provide senior and sub-debt in one instrument
  • Unique “structured” facilities: Debt repaid through a specific contract or asset’s cash flow

It may be that the best financing for you and your company is from a bank, or they may take part in the deal. It may be that several non-bank lenders provide the best solution or that one non-bank lender provides the best opportunity.

Determining the optimal alternative structures for you and your company and allowing the market to compete for the deal is the best way to obtain the most advantageous result.

How to access the private capital market

Accessing the private capital markets is not magical or limited to private equity groups. It does require guidance from professionals who know:

  • How to analyze your commercial & financial needs and craft alternatives to raise capital to meet those needs
  • Groups of lenders in each of several categories that want to participate with your company in the various alternative financing scenarios you are exploring
  • How to create a competitive process for potential capital providers to partner with your company so there is an opportunity to negotiate the best possible:
    • Rates
    • Terms
    • Covenants
    • Amortization schedules
    • Experience and diligence, not magic or genius, are what will get you the money you need in the structure you need it.

Approaching this discussion is about assuring that your company has the funding to optimize its commercial and financial potential; mitigating your risk by balancing your assets between your business and investments outside of it; investing capital in organic growth or acquisitions that will yield an outstanding ROI; or allowing family members or management to buy into your business and stabilizing it for the long term.

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


Related Resources

Should you really sell your company?

Predictive analysis for your business: Cash-flow forecasting

Category: Capital / Cash Management

Tags:  , , ,

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

Learn More

Leave a Reply

Your email address will not be published. Required fields are marked *