Free Newsletter
Today, many business leaders are faced with an increasingly complex business environment and economic uncertainty. Interest rates remain high and material prices and supply chain volatilities continue to hamper business as usual, leading many business owners to evaluate their plans for 2023. Whether they’re looking to align with a new partner, planning for an exit or otherwise seeking new growth opportunities, it’s important to understand the evolving finance trends and possibilities for securing additional capital in today’s ever-changing marketplace. Private equity firms and private debt providers are at the top of that list.
READ — Our Economy in 2023 — What to Expect
While most business owners are used to securing bank loans to help stabilize or grow their businesses, investment banking advisors are increasingly connecting owners to private equity and private debt providers to help them fund their Colorado businesses.
In fact, approximately 80 percent of the mergers and acquisition (M&A) deals completed in 2022 were private equity transactions. This is largely due to efficiency and speed of private equity firms, coupled with the growth of the private equity market, which has raised a record amount of capital in recent years. Reports from PitchBook indicate that in 2022 9,000 private equity deals were closed that were valued at over $1.0 trillion dollars.
Rising interest rates have also made banks pull back on lending, forcing many businesses to look elsewhere for funding, just as the private debt market began ramping up its search for new investment opportunities. As traditional commercial banks become more conservative, private debt funds are more accepting of lending and they have the flexibility to customize debt solutions.
It’s important for business owners to understand this shifting dynamic so that they can appropriately source support and be prepared for the unique requirements that come with it.
Understanding Private Equity and Private Debt
Private debt refers to securing funding from nontraditional lenders, including private debt firms, business development companies (BDCs), structured debt vehicles and Collateralized Loan Obligations (CLO), rather than from traditional commercial banks. Unlike private equity, private debt is highly focused on yield return from a straightforward loan, with no focus on growth returns from equity or ownership.
In contrast, private equity firms inject equity into the deal, which means their capital comes with an ownership stake in the company. They often invest in a wide range of industries and companies, from small- and medium-sized companies to more mature businesses, and they use a variety of investment strategies, such as buyouts, growth capital, and distressed opportunities. Private equity firms also provide operational support and expertise to the companies they invest in to improve their financial performance.
Higher Due Diligence is Critical
Whether you choose to pursue private debt or private equity, both require a high level of due diligence as it’s increasingly competitive to win funding from either source.
Throughout the last year, Denver-based investment banking firm GLC Advisors has assisted in closing more than a dozen transactions involving private equity. Something the team has seen again and again is the crucial importance of due diligence in securing favorable deal outcomes.
Due diligence is the process of thoroughly evaluating a business or investment opportunity in order to assess its risks and potential rewards. It is, unfortunately, an area in which we also see many business owners struggle when preparing for a transaction.
READ — How to Prepare Your Business for Success in 2023: Insights from Founder and Fractional CFO, Dan DeGolier
When it comes to seeking a private equity or private debt loan, below are a few key areas of due diligence that investors tend to focus on, and which business owners should be prepared for if they want to stand out:
- Financial performance: Private equity and debt lenders will expect to see several years of financial statements, including income statements and balance sheets to understand the company’s financial health, track record, and potential for future growth.
- Market and industry analysis: Investors will also want to understand the business’s market and industry, including its competitive landscape, trends, and growth potential.
- Management team: Private equity and debt lenders will assess the capabilities and experience of the business’s management team and potential for operating under new leadership.
- Business plan and growth strategy: Investors will want to review the business’s plans for growth and expansion, including sales strategies, development plans, and financial projections.
- Legal and regulatory compliance: Investors will also want to ensure that the business follows all applicable laws and regulations, including those related to taxes, labor, and health and safety.
Overall, the due diligence process helps investors understand the risks and potential rewards of a private equity or loan investment so that they can make informed decisions about whether to provide capital to a business.
Know When to Seek Investment Counsel
Investment banking advisors are well-connected and know who to call to secure the best possible funding sources for their clients based on their goals. They are also tapped into local markets and know the unique challenges and opportunities that are available based on the region, state, or city a business is operating from or looking to expand into.
Despite reigning economic uncertainty and a potential recession, there are still many opportunities for business owners seeking support, partnership, and capital. Invesment banking advisors recognize the growing roles private equity and private debt play throughout Colorado and can help business owners prepare for and find the right lender for their needs.
There are many factors that affect the value of a business and terms of private equity and private loan funding, including the overall state of the economy, the condition of the industry in which the business operates, the performance and financial stability of the business, and the availability of potential buyers. It is a good idea to work with an investment banking advisor or business broker to help you assess the market and determine the best source of funding for your business.
Michael Fleschner is a director at GLC Advisors, where he provides objective, senior-level expertise for sell-side and buy-side M&A, capital raising, and strategic advisory within GLC’s Business Services & Diversified Industries Sector.
Michael Richter is a managing director at GLC Advisors, and has dedicated his career to advising business owners across a wide range of industries on mergers, acquisitions, debt and equity financings, and strategic advisory assignments within GLC’s Business Services & Diversified Industries Sector.