Five key capital raise considerations for private companies

The world has evolved meaningfully over the last decade. Today, non-bank debt represents the majority of the market. This evolution is driven by conservative approaches from commercial banks, partly due to regulatory dynamics, as well as the ability of non-bank lenders to be very creative with respect to amortization, use of funds, covenant flexibility, and the ability to use payment-in-kind interest.

The wide variety of lenders allows the Deloitte Corporate Finance capital advisory team to be highly selective and creative when advising on the structure and design of the ideal combination of cash payment requirements, operational flexibility, and pricing in order to meet the specific needs and objectives of each client.

In today’s market, the ability to structure capital on a scale from conservative to very flexible is commonplace. Exploring the variety of alternatives across the spectrum is important to developing a structure that fits a company’s unique needs.

The ability to structure a facility to manage cash flow, maximize leverage, and/or pay a dividend is prevalent and allows a company’s shareholders to work through a variety of potential capital need scenarios.

It should come as no surprise—the more flexible the terms of the debt, the more expensive it tends to be. However, the ability to structure a patient capital structure with limited cash requirements is often much more attractive than an equity alternative with its high cost of capital and control implications.

The use of capital often impacts overall debt appetite. Specifically, the acquisition of a company, growth infusion for a new product, shareholder buyout, and shareholder dividend are all viewed differently by various types of lenders.

Regardless of the use, a company should prepare for and be able to articulate its story to the market of potential lenders. The key to developing a competitive process requires developing and communicating a clear qualitative and quantitative story to increase interest from lenders as well as competition for better terms.

On every transaction, senior leaders from the capital advisory team guide this process with intimate knowledge of the market and current feedback from ongoing communication with some of the most active and relevant capital providers in the middle market.

Timing always depends on the scenario. Ultimately, it’s rarely too early to prepare. However, preparation may be primarily an internal process alongside an investment banker, who focuses on capital advisory and lender coverage.

It’s important to prepare for market entry and refine both the qualitative and quantitative story. Additionally, there are strategies to prepare the market for the opportunity to help maximize the odds of a smooth and successful capital raise.

With proper preparation, as the capital need begins to crystallize, the plan can quickly be set into motion in order to meet required timelines.

Does the company have a long-term or short-term financing horizon?

For ambitious company owners, it sometimes takes two transactions over a five- to 10-year period to accomplish the ultimate growth strategy or objectives. It’s useful to assess financing needs and strategies beyond the immediate requirement, which can influence the selection of the ultimate lender as well as the prepayment/refinancing terms of the financing.

Ultimately, planning ahead as you structure and select a lending partner can help prevent a short-term opportunity from becoming a long-term limitation.