Debt Financing — Alternative to Private Equity?
Private debt is absolutely on the rise and represents a very interesting financing alternative to traditional bank financing for medium-sized companies. Particularly in the current economic situation, shareholders and management are faced with major entrepreneurial challenges that often cannot be financed in full or at all via the principal banks — whether because of the complexity, the level of financing required or in view of the entrepreneurial flexibility demanded or required. Similarly, issues such as a possible generation change, succession by the existing management team, the removal of co-shareholders, liquidity requirements outside the company, growth via acquisitions and expansion investments, or capital requirements for investments in the Green Transition and digitization must be financed creatively and flexibly. These are just some of the most burning issues for mid-sized companies and their owners. Private debt funds offer companies a viable and flexible financing solution and stand by the companies as a long-term financing partner
Certain industrial sectors, such as retail companies or automotive suppliers, as well as companies that have a strong dependence on supply chains, raw materials or energy costs, are finding it increasingly difficult to convince bank credit committees of their creditworthiness. Fluctuations in sales, temporary liquidity requirements or slumps in profitability also have a negative impact on banks’ internal credit ratings. Private debt is much more flexible here, aligning financing flexibly with the company’s needs and cash flow and investment planning.
It is precisely this flexibility and speed, as well as an entrepreneurial perspective and customized financing structures, that owner-managed companies appreciate about working with private debt funds. The structure of the loan is usually tailored to the company’s needs in terms of maturities and interest payment terms (e.g. liquidity-saving via capitalizing interest, payable at the end of the term). Strong entrepreneurs also seize opportunities in uncertain times to take market share from competitors, buy competitors and consolidate the market. This is where we at ELF Capital stand ready to finance expansion for companies even in volatile times and markets.
Private equity has been established as an equity financing instrument for succession and growth situations in Germany for years. However, private equity is not the favored solution for every entrepreneur, especially if the entrepreneur does not want to lose control. Corporate private debt offers new solution options for companies and their shareholders, complements the existing financing landscape and closes the often substantial gap for entrepreneurial capital without the loss of majority. When financing through a private debt fund, the entrepreneur retains full control of his company, there is no exit pressure from the sale of the company — and the repayment of the loans occurs over time through refinancing and repayments oriented to the debt and repayment capacity of the company. The he retains the option to keep the fruits of success and entrepreneurial risk and to collect the increase in value of the company entirely himself. Loan funds therefore make an important contribution to the fulfillment of entrepreneurial visions, the transformation of the European SME sector and the promotion of the European economic engine. This makes corporate private debt a genuine and attractive alternative to private equity financing.
About Christian Fritsch
Christian is the founder and managing partner of ELF Capital Group. He is actively involved in sourcing and underwriting new deals and chairs the ELF Investment Committee. Previously, Christian was a partner at ESO Capital. He was also a managing director and head of restructuring and capital structure advisory at Lazard. He has more than 25 years of investment experience in corporate finance in debt and equity and has held senior positions at Anchorage Capital, Cerberus Capital Management and Doughty Hanson in London and Frankfurt.
About ELF Capital Group
The funds advised by ELF Capital specialize in flexible financing solutions for medium-sized companies with a focus on Germany, Austria and Switzerland as well as Northwest Europe. ELF Capital offers individually designed financing solutions for established companies as well as for companies in special situations. The focus is on capital solutions for companies with solid and profitable business models, leading market positioning and good growth prospects.