Banks and debt funds fight for SMEs
Private debt stands for the provision of debt capital by institutional investors outside the capital market and is increasingly seen as a substitute for traditional bank financing. Private debt funds focus on products and situations that have become unattractive to banks due to regulation. Financing instruments that typically fall under private debt are long-term senior loans, unitranche, i.e. financing with both senior and subordinated components, mezzanine & near-equity instruments, receivables secured by real estate or special corporate situations.
In the recent past, it has been observed that private debt funds increasingly offer as wide a range as possible of the financing spectrum outlined above. The advantage of these specialized funds is usually the greater flexibility of the financing instruments and the associated ability to respond to a company’s individual financing situation.
The VALINFUNDS fund platform initiated and managed by IKB acts as a link between institutional investors such as insurance companies and pension funds and German SMEs. With a total committed capital of approximately EUR 600 million, VALINFUNDS offers attractive private debt financing solutions. The platform’s funds each focus on one financing instrument and currently offer senior loans with terms of up to 10 years, for which block maturity is possible, as well as mezzanine capital with terms of up to 7 years. The two funds have so far successfully implemented 13 financings and invested over 200 million euros.
The mezzanine fund focuses on established German SMEs with sales of around EUR 40 million or more. The individual investment per company is usually between EUR 3 and 10 million. The financing occasions are multi-layered and cover, for example, classic growth financing, liability restructuring and acquisition financing, as well as shareholder changes and the strengthening of the capital structure.
The senior debt fund focuses on established German medium-sized companies with sales of approximately EUR 200 million or more and EBITDA of EUR 15 million or more. The individual investment per company is usually between 5 and 50 million euros. Typical financing occasions are growth, acquisition and follow-on financing, and the fund does not require that financing be earmarked for a specific purpose.
Senior debt funds often provide long-term debt capital. This can be collateralized as well as partially unsecured. Because it can be structured individually, private senior debt can be better tailored to a company’s financing needs than capital market products such as bonds. Very often, senior debt is embedded in overall financing structures as a long-term, frequently bullet-maturity component. This can significantly relieve the repayment structure.
Mezzanine capital often comes into play when classic types of financing reach their limits. Even today, banks find it difficult to finance shareholder buyouts, for example. The most common reason, however, is probably that the debt capacity for classic senior capital has been reached and a “gap” in the financing still needs to be closed. Many entrepreneurs also see mezzanine capital as a kind of “war chest” to enable them to react flexibly to opportunities arising in the market with acquisitions or expansion.