According to Bain Company’s Global Private Equity Report 2016, the private equity industry has invested more than 500 billion globally since 2013. In addition, the industry is flush with uninvested cash that reached an all-time high of 1.3 trillion as of the end of 2015. Before approaching private lenders, it is wise to have in-depth knowledge of the way they fund deals. Here are four common ways private lenders fund deals
The Bain Company report found that private lenders are increasingly favoring buy-and-build strategies because they give them more flexibility in terms of steering acquisitions in potentially promising new directions. For this reason, this funding strategy is suitable to entrepreneurs who may be planning to exit in the near future. Private lenders use this approach to capitalize small and medium enterprises as well as large and well-established corporates. Nevertheless, buy-and-build deals are subject to factors such as business cycles, productservice offerings, target consumer segment, and financial health.
Private lenders can also fund entrepreneurs to privatize publicly traded companies. A good example is the blockbuster funding deal that Michael Dell structured to privatize Dell. In fact, figures from the Bain Company report show that public-to-private deals accounted for 60 of the value of US buyouts recorded in 2015. In Europe, public-to-private deals are less popular accounting for just 2 of the total transactional value recorded throughout the same period. They are even rare in developing economies where the funding and deal-structuring environment is relatively young.
Co-investing alongside a general partner (GP) or limited partner (LP)
In some cases, private lenders agree to invest funds alongside a mutually agreed GP or LP. Although this funding approach is relatively new, it is gaining popularity because it gives lenders more bargaining power especially when negotiating new capitalization rounds. Co-investing is also beneficial to entrepreneurs because it enables them to access capital at lower rates than commercially available sources of funding. This is according to the Bain Company report.
Another strategy that private lenders use to fund deals is by participating in secondary market fundraising initiatives. Secondary markets or secondaries have become popular because they enable investors to access the shares of hot Silicon Valley before they go public. A good example is Facebook, which raised capital via secondary markets before its initial public offering (IPO).
The private lending sector has gained more prominence in the last few years due to the success of companies including Facebook and Uber. Some of the funding strategies that private lenders use include participating in secondary markets, co-investing alongside GP’sLP’s, and public-to-private buyouts.