The Upside – What the Explosion in Private Debt Funds Means for Your Business

Posted on: February 21st, 2018

private debt funds for business Private debt funds have come roaring into the corporate finance world and currently have $250 billion of dry powder to invest. The concept is not new as funds such as these have been around since the year 2000.

What’s changed is their size and their broad market focus.For over 2 decades, the US Banking system has failed to develop an effective model for providing growth capital to asset-light growth companies.

As our economy de-industrialized in the 1980’s and 1990’s, banks did not change their requirement for hard collateral.

Even as the new crop of growth companies, tech and service businesses took flight, banks had little flexibility in their lending approaches to fund balance sheet-light companies whose main value was IP, technology and people.

This has been particularly true for middle market companies with EBITDA under $10 million that required direct lending solutions for expansion and acquisitions.

For many years, mezzanine lenders and more recently unitranche lenders were the only direct lending game in town for these companies The middle market is now experiencing a systemic shift in how private companies source direct lending capital.

Private debt funds are laser focused on becoming the go to direct lending channel of choice for middle market companies. While banks have become more responsive to the market of late, there are advantages to working with a Private debt fund.

Non-regulated approach – Private debt funds whether they are owned by hedge funds, asset management funds or investment banks, operate outside of the direct supervision of bank regulators. This means that can take more risk in the capital structure and provide pure cash flow based financing.
Increased lending options – their entry into the market has vastly increased the lending options for middle market companies. They have amped up competition for deals which has decreased pricing and increased term flexibility for borrowers.
Creative Structures – Banks offer standard structures with little room for bespoke alterations. Private debt funds have an ability to go deeper and go longer. They can provide delayed draw tranches, room for lines of credit and even commit to acquisition facilities to support future growth.
Responsiveness – Private debt funds tend to have flat decision making structures and can move quickly. They can move swiftly through proposal to closing, providing certainty of close.
Value add – while interest rates are higher, they offer companies a strong value proposition. They provide more financing in a more flexible structure. A larger loan quantum is a valuable insurance policy enabling a company to confidently complete its growth journey and reach its long term value potential.

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.