Funding From the Private Capital Markets Can Help You Reach Your Strategic Goals Without Bringing in Equity or New Partners

CEOs may pursue multiple avenues to growth and strengthening their company’s strategic position. Investing internally via capital expenditures (CAPEX) or making key hires may be appropriate for some companies, while others may find more attractive opportunities in acquisitions.

A business owner may have as a priority the diversification of their personal wealth so as not to be overly concentrated in the business.

Other business leaders may need to reorganize ownership of their companies.  This could mean concentrating ownership through the buy-out of shareholders who no longer wish to participate in the company. It may also entail passing ownership to the next generation or an executive team.

These actions share a common denominator: the need for external capital.  For a company to achieve its fullest potential, a CEO and their advisors need to understand how much capital is available to them, from whom and at what price. This is especially true if shareholders do not want to give up equity or bring in new partners.

Many CEOs hold a now obsolete view that commercial banks are the best, preferred and perhaps only source of non-equity capital for their companies. Even trusted advisors such as attorneys and accountants can share this bias. And while commercial banks remain excellent sources for asset-based lending, they may not be able to provide cost-effective capital beyond what can be secured with tangible assets.

Funding alternatives abound for CEOs

The corporate landscape has evolved; a greater percentage of companies produce profits and cash flow uncorrelated with or disproportionate to their tangible assets. Essentially, there has been a shift from manufacturing toward services. Companies that provide services, such as technology, distribution, marketing, light manufacturing, healthcare and others, do not require heavy investment in property, plant or equipment, or other physical assets.

CEOs of such companies may find that their trusted commercial bank cannot provide capital beyond the liquidation value of their tangible assets, totaling no more than 1x or 2x EBITDA, even though their business is highly profitable and has a track record of high quality of earnings.

Fortunately, the private capital markets have evolved and grown in recognition of this shift in the U.S. economy.  In addition to commercial banks, debt capital can be sourced from a large and rapidly growing pool of institutional non-bank lenders.  Pension funds, insurance companies, business development companies, family offices, credit opportunity funds and hedge funds are among the capital providers in this market, which currently number over 6,000 participants providing over 50% of the private commercial credit in the United States.

These institutional entities are not bound by the same regulations as commercial banks, allowing them to lend against cash flow and quality of earnings, rather than the liquidation value of tangible assets.  A borrower EBITDA of $5 million is generally the minimum to attract this type of capital, with no upper limit. Types of financing range from senior secured all the way down the capital stack, and current market conditions provide borrowers access to senior debt of 1.75x to 5.5x EBITDA depending on the amount and stability of EBITDA.  The amount of additional capital available to companies can be significant.

Raising capital for the right reasons

 Regardless of the type of capital you wish to raise, it has to be in the context of a rational business strategy.  If your focus is growth, how would having 2x-4x your current presumed funding capacity impact the company’s strategic plan?  Would that increased funding allow for more aggressive organic growth?  Would it allow you to consider more significant acquisitions to fuel enhanced competitiveness, drive growth and increase the value of your business?

There are numerous situations where an owner would benefit from recapitalizing their business, but the limitations imposed by the false belief of needing to raise equity or sell their companies unduly narrow the array of perceived options.

For example: Imagine a CEO who is uncomfortable with having a disproportionate percentage of their personal wealth concentrated in their company.  A recapitalization could be used to fund a dividend, allowing for the de-risking of their personal wealth portfolio. Another familiar situation is a desire to buy out partners or other shareholders who no longer wish to have their lives and financial risk tethered to a private company.

Common wisdom might suggest selling the company or bringing in a private equity investor, even if the CEO has no wish to sell or take on new partners.  However, a debt recapitalization allows the buy-out of some or all such shareholders, concentrating ownership with the CEO and aligning shareholder interest while avoiding governance issues.

Knowing how much funding is available to your company may provide fuel to reach your strategic goals, and even recalibrate your vision.  Whatever your funding requirements, business owners and CEOs should know that they have alternatives.  The Private Capital Markets have the depth and flexibility to allow you to reach your goals without compromising control of your company.

Accessing the Private Capital Markets: Cash Flow vs. Asset-Based Borrowing

Many CEOs believe the amount of reasonably priced senior capital their company can obtain is limited by the hard assets that can be pledged as collateral: inventory, receivables, machinery, equipment, etc.

That is simply no longer true.

Over the last two decades, the success and profitability of US businesses have become less dependent on owning hard assets.

Highly skilled people, technology, customer experience, provision of services, and other forces are the predominant factors in a company’s health. Even for asset heavy businesses, the difference between success and failure is usually not their hard assets, but having the people, strategies, processes, systems, and technologies to beat the competition.

Private Capital Market participants have developed a deep and flexible toolkit to provide capital that fuels this evolution in the US economy.

Commercial banks, especially in the lower middle market, tend to be more asset focused. Their basis for lending is having sufficient collateral so their loans will be paid off if the borrower has to be liquidated.

Non-bank lenders and some commercial banks are increasingly “enterprise” vs. asset-based in their investment analyses. For these lenders, EBITDA, “Adjusted EBITDA,” cash-flow available for debt service, and getting comfortable with the quality and consistency of a company’s earnings have replaced the liquidation value of hard assets as the basis for providing capital to clients.

Asset-based lending is still the least expensive, and for smaller companies perhaps the only form of senior capital available. Once a company passes $3 million in EBITDA, private capital market participants want to talk.

Key differences between asset-based and cash flow borrowing include:

  • Cost: cash flow borrowing can have interest rates 2%-4% higher than asset-backed loans
  • Capital Available: commercial banks and asset-backed lenders are usually limited to fixed percentages of available collateral, and top out at 3x EBITDA. Cash flow lenders can go to 4.5x EBITDA on senior debt. This additional capital availability can make a significant difference for companies that have good use for funds.
  • Amortization: Banks will require a minimum of 10% fixed annual amortization, and often more, depending on the terms of a loan. Cash flow lenders can create amortization schedules that are flexible and may be as low as 1%-5% annually. This allows more of your cash flow to be re-invested or used for dividends.

The flexibility available to companies seeking funds from the private capital markets is not a “one size fits all” proposition.

For many companies, a blend of asset-based and cash flow borrowing might create an optimal outcome. For others, very low cost asset-based borrowing might be the right way to go.

If you are the CEO of a healthy company where success and profitability are not based on having more hard assets, and where growth investments (whether for organic growth or external acquisitions), buying out partners or “taking some chips off the table” are smart things to do, cash flow based borrowing may provide more capital at a lower cost than you had thought possible.

This article addresses only the narrow topic of raising senior capital. Information on other funding options available in the private capital markets will be addressed in future articles.

If you have any questions, please reach out to me at


Mark Taffet is CEO of Mast Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies. Information regarding specific aspects of the private capital markets has been provided by SPP Capital Partners, an investment bank focused on raising funds in the private capital markets.

Accessing the Private Capital Markets: Raising Money for Your Company Without Giving Up Equity

There are many reasons you may want to raise money for your company, among them:

  • Fund organic growth or strategic acquisitions;
  • Provide a dividend to balance your concentration of wealth between your company and investments held as an individual; and
  • Allow for your “Next Generation” or management team to buy into the business for fair value

Your company is valuable and has strong quality of earnings.  Your bank doesn’t “see it” and is limiting capital availability to a percentage of asset coverage AND they want a personal guarantee.

Why can’t you obtain funding the way Private Equity players do; just wave a magic wand and have money go from your pocket to their pocket and back to you?

You CAN raise capital just like private equity players do, without giving up equity ownership in your business.  There is no magic or genius to it; just having someone to guide you through the process of raising money on the private capital markets.

What are the Private Capital Markets?

Many CEOs believe that commercial banks are THE sole source of debt capital for their companies.  This was never true, and ignores an enormous shift in capital availability since “The Great Recession”.

Prior to The Great Recession, commercial banks became aggressive in their lending practices and bets  for their own investment accounts.  When such banks had reality bite in the recession, it threatened the national – and international – economy.  YOU, as a taxpayer to the US government bailed out the banks.  The expectation among such banks that they will be bailed out is called “Moral Hazard”.

Regulations were placed on commercial banks to prevent another melt-down and discourage moral hazard.

  • The Federal Reserve, the Office of the Comptroller of the Currency (“the “OCC”) and the FDIC established “Leverage Guidelines”
    • Generally limited commercial banks’ capacity to lend (no more than 3X LTM EBITDA)
    • Enforced higher fixed amortization rates (~10%-15% per annum)

For every action there is a reaction.  In this case, the reaction was the creation of several types alternative “non-bank” commercial lenders that have more than reached critical mass.  There are now over 5,000 such lenders and they comprise approximately 50% of the private debt capital available to corporate borrowers.  These lenders take various forms and include:

  • Credit Opportunity Funds
  • Business Development Companies (“BDCs”)
  • Insurance Companies
  • Non-Bank Direct Lenders
  • Family Offices

Commercial Banks vs. Institutional Alternative Lenders

Fundamentally, raising capital from commercial banks and alternative lenders is identical.  Risk/credit analysis is performed, financings are accepted or rejected.  The debt is “priced”.  Due diligence is completed and loan documentation is put in place to close the deal.

The critical differences today between commercial banks and alternative lenders involves the risk each can take on and the repayment terms they can offer.

As a general proposition, non-bank lenders

  • Tend to be much more comfortable with “cash-flow” lending, and are not limited to   “asset-based facilities” or other measures of the value of the borrower’s collateral
  • Maybe a little more expensive than commercial banks,
    • but have less stringent fixed amortization (1%-7% per annum)
    • looser covenants
    • more generous leverage multiples (4X LTM EBITDA) and
    • no need for personal guarantees
  • The transaction process itself is quite similar to the way a bank approves a loan
    • They receive an offering memorandum, perform their own credit review and engage counsel to document the deal
  • When professionally presented, the transaction process should take 8-12 weeks

Accessing the market

Alternative institutional lenders generally require some minimum deal size to have interest in a transaction.  $10 million as a minimum amount is generally a good rule of thumb.  Accordingly, accessing the entire breadth of capital providers is for companies that are at least mid-sized – $3 mil to $5 mil in EBITDA.  For companies that do not meet this threshold, commercial banks are probably the best capital source.  The best way to create more options for your company is to GROW PROFITABLY.

When approaching the private capital markets, all options should be explored; bank and non-bank lenders should be given the opportunity to compete for your business.  More than one structure for raising capital is usually available.  These alternatives can be CRAFTED TO MEET THE VERY SPECIFIC FINANCIAL AND COMMERCIAL GOALS of you and your company.

Once you broaden the horizon of potential capital sources, it is important to determine the type of deal that is best for you.  The types of debt capital that can be made available include:

  • Senior Revolving Credit facilities,
  • Terms Loans;
  • Mezzanine Securities – instruments that are “junior” or “subordinate” to senior debt
  • “Unitranche” Facilities- all senior facilities that provide senior and sub debt in one instrument.
  • Asset-based  or Cash flow facilities
  • Unique “structured” facilities—debt repaid through a specific contract or asset’s cash flow

It may wind up that the best deal for you and your company is from a bank; or they may take part of the deal.  It may be that several non-bank lenders provide the best solution or that one non-bank lender provides the best opportunity.

Determining the optimal alternative structures for you and your company and allowing the market to compete for the deal is the best way to obtain the most advantageous result.

Process of accessing the market

Accessing the private capital markets is not magical nor does it require genius.  It does require guidance from professionals who know:

  • How to analyze your commercial & financial needs and craft alternatives to raise capital to meet those needs
  • Groups of lenders in each of several categories that want to participate with your company in the various alternative financing scenarios you are exploring
  • How to create a competitive process for potential capital providers to partner with your company so there is an opportunity to negotiate the best possible
    • Rates
    • Terms
    • Covenants
    • Amortization schedules

Experience and diligence, not magic or genius, are what will get you the money you need in the structure you need it.

Approaching this discussion is not about over-levering your company and putting it, and your personal wealth, at risk.  Rather, mitigating and diminishing your risk by getting money out of your company to balance your risk; investing capital in organic growth or acquisitions that will yield an ROI of more than 2x your borrowing costs, or; allowing family members or management to buy into your business, and thus stabilizing it long term are goals deserving of your attention.

This overview covers many points that each deserve dozens of pages of explanation.  Should you wish to take a next step in exploring opportunities your company may have to raise capital, please reach out to me at