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Capital Raising | M&A Advisory

Private Capital Expands the Financial Solution Set and Options for Private Companies

May 2023 CEO Minute by Matt Plooster, CEO—

Raising capital has always been a crucial, but often difficult process for private companies. Historically, there have been two main options for companies looking to raise capital. The first is to use debt capital or commercial lending capital through banks. While it can certainly be the right method in many contexts, banks tend to be very conservative with their lending policies – and rightfully so given their return expectations. They generally want to give out as much they can get back safely and quickly. For private companies looking to acquire larger amounts of capital to fund operations or growth, acquisition, shareholder liquidity or other initiatives, traditional bank lending options may not completely satisfy their needs.

The alternative to bank lending in the lower and middle market historically has been private equity, where funds pay to buy equity in a company, typically with an expectation of a 30% annual return or more. While this can provide a larger infusion of capital relative to what a traditional bank may offer, it also usually results in the company’s existing ownership losing at least some control over their company.

Banks and private equity sit at the opposite ends of a large spectrum of ways in which business owners can raise capital for their company. Private capital exists to fill that middle ground. While it is similar to private equity in that private funds or institutions provide capital to businesses to fund growth and operations, private capital can allow companies to acquire funding amounts in excess of capital available from the bank universe without relinquishing any control, something we often call “non-dilutive capital.”

The availability of private capital has grown as the capital ecosystem has become more efficient over time. Now, what I call Main Street companies – successful private companies that are smaller than, for example, the Fortune 500 companies of the world – can access the same 5 to 20% capital those large private and public companies have always had. Simply put, private capital expands the financial solution set and options for private company owners.

This is especially useful right now, when we’re at a place in the financial cycle where there’s lots of talk and fear about recession, and public markets have been less predictable. This has led banks to actively limit their exposure by lending less, since they are beholden to regulations that force them to be very safe regarding the risk they take on. On the private capital side, private investors are seeking out new channels for investment beyond the public markets, and are able to price risk at any rate they want. That opens up unique opportunities for private companies to take on more capital and/or use capital for less traditional objectives than banks typically prefer.

From our perspective as investment bankers, the increasing efficiency and prevalence of the private capital ecosystem is exciting, as it provides us with even more ways to help our clients achieve their goals. If a client tells us, “I’ve been doing this for 30 years. I’ve been personally guaranteed. I’ve never been able to save any money because it all goes back into the business. I don’t want to sell the business. I’d love to keep it and keep the people that I love and care about and keep working towards our mission,” private capital may be the best way to help the business grow while not diluting the ownership’s ability to control the direction of the company. We’re able to work with a wider set of solutions to help our clients achieve goals like this.

Private capital can eliminate personal guarantees for private owners, limit amortization, and provide more capital to accomplish things that banks generally don’t support and private equity holders might push back against. It’s an option that has existed for the largest public companies for decades, but is now becoming more available to those private, Main Street companies.

The most important thing for private company owners is to know their options. That can mean working with an investment bank, like Bridgepoint, that can listen to your wants and needs and provide various options to accomplish specific goals that are tailor-made for your company. If a client tells us they want to sell their family business, we can take a step back and figure out if that’s what they actually want to do or if they think that’s the only option they have to achieve personal liquidity. We’ll listen, learn and work together in order to find the ideal solution that fits your goals. That’s what we do best and it’s an extremely rewarding part of our process.

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