3 questions to smart minds

Debt Financing — Alternative to Private Equity?

For this 3 questions to Christian Fritsch

ELF Capi­tal Group in Frankfurt
Photo: Chris­tian Fritsch
25. July 2023

In Germany, loan finan­cing through private debt funds is incre­asingly being used as corpo­rate finan­cing. Supply is also incre­asing, as tradi­tio­nal banks are only allo­wed to take on limi­ted risks. This parti­cu­larly affects medium-sized compa­nies, which have far-reaching finan­cing requi­re­ments. Ther­e­fore, the ques­tion arises whether private debt finan­cing is not only an alter­na­tive to tradi­tio­nal bank finan­cing, but also to private equity.

For this 3 ques­ti­ons to Chris­tian Frit­sch, foun­der of ELF Capi­tal Group in Frankfurt

1. Banks are curr­ently no longer able to fulfill their finan­cing mandate to compa­nies without further ado, resul­ting in a finan­cing gap. Can loan funds, like ELF Capi­tal, fill the need?

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

2. Do you perceive indus­tries that are incre­asingly coming your way? Do entre­pre­neurs use debt finan­cing for consolidation?

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.

3. Given the current situa­tion, do you see debt fund finan­cing for compa­nies as a valid alter­na­tive to a sale to private equity?

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.

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