Posted on: January 6th, 2021

growth capital

Last year was a year of surprises with not a single prognosticator raising the possibility of a global pandemic in early 2020. Most middle market finance observers cautioned an ending of the benevolent credit cycle in early 2020, but few saw a pandemic as the catalyst for it.

The end of 2019 had a sleepy feel to it, not unlike the market ambivalence before the 2008 Credit Crisis. It felt as if we were close to the end of the economic cycle, but no one could point conclusively to the reason why. We went from a feeling of economic confidence at the end of 2019, to a period of stunned pessimism by March 2020. Having gone through the 2020 pandemic, a black swan event if ever there was one, we all now understand that not all events are forecastable even over the short term.

All business planning for the new year went out the window and companies went into defensive survival mode. On the banking end, most banks rarely gave much thought to a pandemic and the effect it would have on their borrowers, prior to 2020. Credit officers, who usually embody the sum of all fears, were caught by surprise which forced them to recalibrate their entire approach to risk. The spike in risk and fear in the economy caused a rationing of available credit, as banks were tending to their wounded.

The funding gap in the market was addressed through several governmental liquidity efforts, but not all companies were able to access these programs leaving them in the financial wilderness. Given the effect of the pandemic on the economy, middle market companies would be well served to focus on raising growth capital in 2021. All companies need a liquidity buffer to get through tough times, and growth capital can be used to ride out recessions.

In its purest form, growth capital facilitates corporate growth and allows a business to invest strategically in business development. Instead of relying on internally generated cash flow, growth capital empowers you to proactively invest in growth. When you have a source of committed growth capital on your side, you are in a strong financial position.

During economic disruptions, opportunities present themselves if you have the capital to act. If a company has the fortitude to expand or acquire during a recession, it can often take advantage of lower acquisition prices and market entry costs. The key with growth capital is to line it up early and ensure you have access to it, ahead of any planned investment or market dislocation. Growth capital can not only help increase the size and value of your business, but also help provide transitional financing during tough times.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.

The Case for Growth Capital in 2021