The economy is ripe for liquidity and capital-formation activity, and middle-market executives are confident in their ability to secure financing and close deals before the end of the year. According to a recent CohnReznick study of 300 C-level executives, 1 in 5 say they are planning to do a capital raise or liquidity event in the next six months. These middle-market executives know this is a time of great opportunity: 90% of executives surveyed are optimistic about their ability to raise capital if they need it.
While two-thirds of respondents indicated that a commercial bank is one of the “most likely sources of capital for a liquidity event or capital raise,” executives are also considering other options. This seems prudent. Though many banks are eager to expand their business loan portfolios, regulatory constraints often keep banks from lending to highly leveraged businesses.
In contrast, financial sponsors such as private equity groups, venture capital firms, and mezzanine lenders are vigorously pursuing growth opportunities. While middle-market executives have invested in building relationships with commercial banks and are familiar with the process of working with them, these executives are also optimistic about their ability to raise capital from financial sponsor sources. Eighty percent of these executives say they are optimistic that they could raise adequate capital from non-bank financing. Given the level of competition among lenders, today’s borrowers can obtain much better terms than they did both during and after the financial crisis.
Three Private-Capital Opportunities to Consider
If you think your growing company could benefit from working with a non-bank lender, you’re not alone. Below are three private-capital lenders that, according to the CohnReznick survey, middle-market executives say they consider to be one of their “most likely sources of capital” for a liquidity event and capital raise:
- Private Equity Firm: Almost half of survey respondents (41%) say they are likely to work with a private equity firm to raise the capital they need. If a company has established product lines and cash flows, working with a private equity firm can be a great way to gain special skills and receive assistance managing the increased complexity that accompanies growth. A PE firm can provide not only financial capital to your company, but also intellectual capital. A PE firm can work with you to evaluate staff and develop a strategic plan to optimize performance.
- Venture Capital Firm: Venture capital opportunities are also very popular with middle-market executives: One-third (35%) of those surveyed report that VCs are one of their “most likely” sources of capital. While traditional venture capital remains a key source of startup funding, it seems unlikely to keep pace with the rate of new company creation. The number of total funded VC deals has remained relatively flat, and even in light of increasing capital efficiency by these companies, there aren’t enough VC dollars to meet the demand. Consequently, growth companies may need to look to other sources of innovation capital to fill the void.
- Mezzanine Lender: Finally, 1 in 5 executives surveyed say that mezzanine lenders are one of their “most likely” sources of capital. Mezzanine financing deals are typically bridge loans that span funding gaps until cheaper capital can be had. In general, mezzanine loans are short-term debt—usually averaging about three years in length—provided by private equity firms rather than banks. Companies that use mezzanine financing typically have under $250 million in annual revenues. They often have found themselves in a situation where they are ready to grow, but don’t have enough extra capital to fund expansion to meet increasing demand.
To learn more about the various sources of bank and non-bank capital, typical transaction terms, and next steps, register for CohnReznick’s upcoming webinar Raising Private Capital.