While the early days of the pandemic were considerably difficult for many sectors—and some businesses are still reeling—others find themselves on solid ground. In many industries, the landscape has already changed markedly, presenting opportunities for future growth if business leaders know how to take advantage of them.
The first step can be considering additional liquidity. There are many lesser-known sources of liquidity available to business owners seeking to secure financing that provides them with the flexibility to choose their own growth path without sacrificing future potential.
For example, combining senior debt or equity capital with other sources of liquidity, like mezzanine debt, can provide companies with the flexibility to address specific needs while preserving the long-term health of their balance sheet. Mezzanine debt is the middle layer of capital positioned between senior debt and equity. Unlike senior debt, mezzanine debt underwriting is typically cash-flow based rather than collateral. It is often non-amortizing, and although typically carrying a higher interest rate than traditional senior debt, it is non-dilutive, unlike equity capital. As a result, it can be a finance source to limit cash outflows to preserve liquidity while also limiting equity dilution.
Here are a few ways this flexible financing can allow business owners to reach their own unique goals throughout an economic downturn and beyond:
Finance an acquisition with ‘patient capital’
Acquisitions can serve as a catalyst to propel middle-market businesses to higher levels of growth. But financing a deal during periods of economic contraction presents both challenges as well as opportunities. Many companies need time and flexibility to integrate an acquisition. Because it’s non-amortizing, mezzanine debt can provide “patient capital” during these times. Factoring mezzanine debt into such a transaction can also help lower the overall costs to the business owner, as selling a stake to equity investors or raising internal equity capital can come at high cost in equity dilution.
Emerge from the pandemic even stronger
Companies with scale have the opportunity to come out on the other side of the pandemic even stronger than they did going in. With the uncertainty of the pandemic and economic fallout persisting, many companies will take a wait-and-see approach by sitting on the sidelines. This creates an opportunity for prudent business owners to elevate their competitive position by investing in growth initiatives or even acquiring another company. Consolidation creates economies of scale and efficiencies that can help weather the storm and strengthen a company’s market position. By investing now, business owners can set themselves up for greater success down the line.
Diversify personal net worth without sacrificing controlling stake
During times of economic uncertainty, business owners who have a large portion of their assets held in their company may want to better diversify their personal net worth. Under a hybrid financing model that incorporates an equity transaction and mezzanine debt, business owners have the opportunity to sell a minority stake in the company. This provides them with some personal diversification while also allowing them to retain a controlling interest in the business. It also provides the company with a jolt of working capital to fund growth initiatives.
How will you use mezzanine debt?
By using mezzanine debt to fund growth initiatives, middle-market CEOs can receive the capital they need to invest in their futures without taking on dilutive equity or amortizing senior debt that can hinder free cash flow conversion and liquidity. Business owners today can write their own growth stories, on their own terms, and in their own ways. While the true economic impact of coronavirus remains uncertain, there are still opportunities for middle-market businesses to reach their goals now and in the future.
Anne Vazquez is a General Partner of NewSpring Capital, a leading provider of private equity capital managing over $2.0 billion, and is a General Partner of the Firm’s dedicated mezzanine funds. Anne joined the Firm in 2008 and she has more than 14 years of experience in investing, consulting, and strategic planning in growing lower middle-market companies. To learn more, visit www.newspringcapital.com.