3 questions to smart minds

Private debt financing for small and medium-sized enterprises

For this 3 questions to Olya Klüppel

ESO Capi­tal
Photo: O. Klüp­pel | ESO Capital
12. Novem­ber 2014

Private debt finan­cing origi­na­ted in the Anglo-Saxon world, where it has long been used as an estab­lished instru­ment in growth finan­cing and corpo­rate take­overs. One of the reasons why private debt provi­ders are attrac­tive is that they can also provide finan­cing where the banks turn them down, for exam­ple if a company’s cash flow profile does not permit repay­ments in the short term. Another advan­tage of debt funds is that their decis­­ion-making is not as domi­na­ted by inter­nal poli­tics as in many banks.

For this 3 ques­ti­ons to Part­ner at ESO Capi­tal in Zurich/ London

1. For whom is private debt finan­cing suita­ble? What is the compo­si­tion of your target group?
Private debt finan­cing can be used by family busi­nesses as well as private equity finan­ced compa­nies and young compa­nies in the growth phase. ESO Capi­tal has focu­sed on special or turn­around situa­tions on the one hand and on growth finan­cing on the other. In turn­around situa­tions, we help owners elimi­nate struc­tu­ral balance sheet comple­xi­ties, for exam­ple by repla­cing infle­xi­ble bank loans in situa­tions where over-indeb­ted­ness is immi­nent. ESO Capi­tal does not inter­fere in the manage­ment of the company, but sees itself as a support­ing part­ner of the exis­ting manage­ment in its turn­around stra­tegy. In growth finan­cing, we focus on compa­nies with viable busi­ness models that need capi­tal to finance acqui­si­ti­ons, geogra­phic expan­si­ons or working capi­tal, but want to avoid share dilu­tion. Typi­cally, such compa­nies are looking for mino­rity invest­ments, for exam­ple. Venture Capi­tal, as they have not mana­ged to get money from a bank and are simply not aware of the private debt alter­na­tive. Our solu­ti­ons provide addi­tio­nal corpo­rate capi­tal without signi­fi­cant dilu­tion of exis­ting share­hol­der stakes, enable the achie­ve­ment of growth targets and streng­then the company’s balance sheet by diver­si­fy­ing funding sources. This approach streng­thens the nego­tia­ting posi­tion in future poten­tial finan­cing rounds or stra­te­gic sales nego­tia­ti­ons. Eligi­ble compa­nies typi­cally have sales between 20 and 200 million euros and are often not yet profi­ta­ble due to signi­fi­cant growth invest­ments. As a lender, we evaluate compa­nies on the basis of a conser­va­tive busi­ness plan to ensure that the borrower gene­ra­tes suffi­ci­ent cash flows even in a down­side scena­rio and has suffi­ci­ent assets as poten­tial collateral.
2. What are the process and condi­ti­ons of private debt financing?
We do not use stan­dard term sheets, but try to under­stand and incor­po­rate the indi­vi­dual needs of the company, the expec­ted cash flow profile as well as the over­all busi­ness plan in order to provide a custo­mi­zed solu­tion for the borrower. Our signi­fi­cant advan­tage is that we invest across capi­tal struc­tures and are ther­e­fore in a posi­tion to contri­bute equity if the situa­tion of the company requi­res it (prima­rily compa­nies that have emer­ged from insol­vency or are facing liqui­dity problems). ESO focu­ses on deals with a finan­cing volume of 10 to 30 million euros typi­cally over a term of 1 to 4 years. We offer our custo­mers tail­o­red flexi­bi­lity in terms of matu­rity, inte­rest payments (PIK/cash), repay­ment profile and the compo­si­tion of the return. The loan is secu­red by the borrower’s assets, inclu­ding fixed assets, receiv­a­bles and invent­ories, and in certain cases intellec­tual property (IP). The contrac­tual condi­ti­ons include certain mini­mum profi­ta­bi­lity requi­re­ments and are struc­tu­red on the basis of compli­ance with cash flow covenants. Equity compen­sa­tion or warrants form part of the return; we are also open to compa­ra­ble “non-equity” perfor­mance compen­sa­tion such as special payments in the event of a company sale. The invest­ment process at ESO is usually comple­ted in 6 weeks or faster if necessary.
3. How do you assess the future demand for private debt financing?
We expect private debt finan­cing volu­mes for SMEs to increase in the coming years. Compe­ti­tors have exis­ted in this sector for some time, but they are mainly driven by insti­tu­tio­nal inves­tors’ inte­rest in the segment. Although the market is well served by corpo­rate finance advi­sors, lawy­ers and accoun­tants, there are still inade­quate finan­cing opti­ons for SMEs. Private debt is another attrac­tive finan­cing alter­na­tive that offers a number of advan­ta­ges thanks to its struc­tu­ral flexi­bi­lity and rapid proces­sing. Even though the cost of such a loan is higher than a bank loan, there is still a signi­fi­cant advan­tage to working with lenders who under­stand the busi­ness of the company. Private debt will conti­nue to estab­lish itself as a source of finan­cing for cross-border expan­si­ons, the deve­lo­p­ment of new busi­ness areas and turn­around situations.

Subscribe newsletter

Here you can read about the latest transactions, IPOs, private equity deals and venture capital investments, who has raised a new fund, how Buy & Build activities are going.

Get in touch

Contact us!
fyb [at]