3 questions to smart minds

Growth with private equity or a corporate bond?

For this 3 questions to U. Kolb

Photo: U. Kolb | BRIDGEPOINT
3. Septem­ber 2013

Private equity, corpo­rate bond and bank loan — compa­nies have a choice. Bonds are curr­ently beco­ming incre­asingly popu­lar, espe­ci­ally among medium-sized compa­nies. This means that private equity provi­ders and other inves­tors are defi­ni­tely in a certain compe­ti­tive rela­ti­onship. While private equity is mostly about equity inves­tors, bonds are about borrowing.

For this 3 ques­ti­ons to Chair­man of BRIDGEPOINT in Frank­furt am Main

1. One gets the impres­sion that compa­nies are incre­asingly conside­ring a corpo­rate bond instead of a private equity inves­tor. What is your percep­tion? Are the two finan­cing alter­na­ti­ves in compe­ti­tion with each other?

The two finan­cing alter­na­ti­ves — corpo­rate bonds and private equity — are basi­cally not in compe­ti­tion with each other. The corpo­rate bond, which is a type of debt finan­cing, tends to compete with bank finan­cing as a tradi­tio­nal route for compa­nies. The renais­sance of the corpo­rate bond is a reflec­tion of the regu­la­tory measu­res for banks, which (have to) be very rest­ric­tive in gran­ting loans after the finan­cial crisis, so that medium-sized compa­nies are looking for alter­na­tive ways of finan­cing. If an entre­pre­neur is also conside­ring ways of self-finan­cing in this context, he will usually also consider an invest­ment via private equity. The prere­qui­site here, howe­ver, is that he is prepared to surren­der shares in the company; this is not the case with the issue of bonds.

2. Which compa­nies are more likely to want to raise capi­tal through a corpo­rate bond and which ones prefer a private equity investor?

Entre­pre­neurs conside­ring the entry of a private equity inves­tor have usually clari­fied the basic ques­tion of equity or debt finan­cing and deci­ded in favor of an equity inves­tor. But not every company is suita­ble for private equity.

Typi­cally, private equity is conside­red in the follo­wing situa­tions: (a) Finan­cing strong growth in an indus­try in conjunc­tion with estab­li­shing or expan­ding inter­na­tio­nal presence, (b) Finan­cing the deve­lo­p­ment of struc­tures when growth thres­holds are reached, © Provi­sion of capi­tal after tradi­tio­nal finan­cing instru­ments have been exhaus­ted, (d) Finan­cing in the event of tempo­rary econo­mic diffi­cul­ties of a company, (e) Busi­ness sale / busi­ness succession.

Private equity inves­tors provide equity invest­ments over a period of usually 5–10 years. Private equity inves­tors actively support the imple­men­ta­tion of the respec­tive stra­te­gies through their presence on the boards with a clear gover­nance struc­ture and involve the manage­ment team in the company and its success.

3. Are corpo­rate bonds a trend that will abate again in the fore­seeable future? If yes, why?

I see corpo­rate bonds as a sustainable trend, espe­ci­ally for medium-sized compa­nies. Until the finan­cial crisis, corpo­rate bonds as a way of raising debt capi­tal were only available to blue chip compa­nies, but this chan­ged with the finan­cial crisis. Bonds provide the mid-market entre­pre­neur with an alter­na­tive route of raising debt capi­tal outside of tradi­tio­nal bank finan­cing, which histo­ri­cally has been over 80%. Banks now have to provide more equity capi­tal for “risky” loans than before the finan­cial crisis and have ther­e­fore become very selec­tive in their lending. This has led to major distor­ti­ons on the corpo­rate side, as capi­tal requi­re­ments could not always be met and compa­nies have run into diffi­cul­ties as a result. The issu­ance of corpo­rate bonds also gives the medium-sized company the oppor­tu­nity to inte­rest inves­tors in the company via the capi­tal market and to raise the neces­sary funds. The regio­nal exch­an­ges in Germany now offer good plat­forms for this with their own market segments.

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