Introduction
Recently, we have seen both investors and issuers switch their preference from private equity to private debt, otherwise known as private credit. The feel on ground is that there are several key reasons behind this shift, including flexibility, speed, and the fact that it allows businesses to avoid giving up control. We delve a little deeper into our approach and why companies may be looking to issue debt privately into the market.
What is Private Credit?
Private credit is a type of alternative investment, meaning the underlying investment is typically non-market correlated. Private credit refers to non-bank lending to private companies or individuals. These investments can take various forms, such as direct lending, mezzanine financing, distressed debt, and asset-backed lending. Understanding the different types of private credit is essential for informed decision-making.
Within the private credit market, investors lend to investee entities – be they corporate groups, subsidiaries or special purpose vehicles established to finance specific projects or assets – in the same way that banks lend to such entities. Private credit investments are typically used to finance business growth, provide working capital, or fund infrastructure or real estate development.
Flexibility That Fits the Business
One of the biggest draws of private debt is the ability to tailor loans to suit a company’s specific needs. Public debt, like issuing bonds, tends to come with rigid terms that leave little room for adjustment. Interest rates, repayment periods, and conditions are largely set in stone, making it harder for companies to find something that fits their unique circumstances.
Private debt, however, is much more flexible. Lenders in this space are often more willing to negotiate terms, whether that’s adjusting repayment schedules or offering more favourable rates based on a company’s cash flow.
Speed and Less Red Tape
Another big reason companies are leaning towards private debt is the speed at which they can access the funds. Public debt, like issuing bonds, can be a long and drawn-out process involving regulatory approvals, credit ratings, and waiting for the right market conditions.
Private equity, while offering large sums of capital, also comes with its own delays. Lengthy negotiations, detailed due diligence, and multiple stakeholders can slow things down significantly.
In contrast, private debt deals tend to move much faster. With fewer regulatory hurdles and quicker negotiations, companies can secure the funds they need in a matter of weeks, which is ideal for businesses in need of swift capital injections.
No Dilution of Ownership
A key downside of raising capital through private equity is that companies often have to give up a share of ownership. Selling off equity means founders and existing shareholders lose control, which can be particularly unappealing for those with a long-term vision for the business.
Private debt offers a way to raise capital without having to hand over part of the company. While loans do come with repayment obligations, the company’s ownership remains unchanged. This is a significant advantage for businesses wanting to maintain control and keep future profits within the company.
Cost-Effective Capital
When it comes to cost, private equity might seem appealing because there’s no debt to repay upfront. However, in the long run, giving up equity can be the most expensive form of capital due to the dilution of future profits.
Public debt, like bonds, can offer lower interest rates, but the process is often costly and complex, involving underwriting fees, compliance costs, and the need to navigate market conditions. Smaller companies, or those without strong credit ratings, may also struggle to access favourable terms in the public markets.
Private debt can strike a balance between these two options. While interest rates may be higher than public debt, the ability to customise terms and avoid hefty transaction costs makes it a cost-effective choice for many businesses.
Less Exposure to Market Swings
Public debt markets are highly sensitive to economic conditions, interest rates, and market sentiment. Issuing bonds can be risky or expensive during uncertain times, as companies may face unfavourable terms or high scrutiny from investors.
Private debt, on the other hand, is less influenced by short-term market volatility. Deals tend to be more relationship-driven, with lenders focused on the long-term health of the business rather than day-to-day market fluctuations. This makes private debt a more stable option for companies seeking reliable funding.
Conclusion: Our focus
Our mission is to support growth companies, with tangible assets looking for a ‘’mini-securitisation’’ issuance. It gives investors the level of risk-reward they have appetite for, and it allows companies to grow much quicker and sustainably. The business owners are the life blood of the companies with the vision to grow and success; private credit allows them to continue focusing on what they do best instead of trying to appease their new “partner” under the typical GP / LP structure seen in private equity.
Our Advisory division has been engaged by asset managers and business owners from across the UK, Europe and the US to meet their growing demand for private credit. These businesses span a whole range of sectors and asset classes including business-to-business lending, social housing, and US student loans. Our approach allows for these businesses to develop flexible and sustainable private credit issuance, whilst on the other hand, meets the risk-return appetite of our global investor base.
Should you be interested in raising capital or looking to explore your options, lets connect at john.hubball@kingsburyandpartners.ae
