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The importance of private capital for businesses in search of funding.
Raising capital has always been a pivotal yet often arduous endeavour for private enterprises. Historically, these businesses have had two primary avenues to secure much-needed funding. The first involves tapping into debt capital or commercial lending facilities offered by banks. While this method can be suitable in many scenarios, banks are renowned for their cautious lending practices, a stance that aligns with their prudent return expectations. They typically aim to disburse funds with a high degree of confidence in quick and secure returns. Conventional bank lending options may prove inadequate for private firms seeking substantial capital injections to support their operations, expansion, acquisitions, shareholder liquidity, or other initiatives.
In the lower and middle market segments, the alternative to bank lending has traditionally been private equity, where investment funds acquire equity stakes in companies, often expecting annual returns of 30% or more. While this approach can provide a larger infusion of capital than traditional bank loans, it invariably results in existing ownership ceding at least some control over their business.
“The alternative to bank lending has traditionally been private equity, where investment funds acquire equity stakes in companies, often expecting annual returns of 30% or more.”
Within the realm of raising capital, banks and private equity represent the polar extremes of a vast spectrum. It is in this middle ground that private capital comes into play. Similar to private equity, private capital involves funds or institutions providing financial resources to businesses for growth and operations. However, private capital allows companies to secure funding amounts that surpass what is typically available through traditional banking channels, all without relinquishing any control—a characteristic frequently referred to as "non-dilutive capital."
Expanding Access to Private Capital
The accessibility of private capital has expanded with the increasing efficiency of the capital ecosystem. Today, successful, privately held businesses can tap into the same capital resources that have historically been the domain of larger private and public entities. In essence, private capital broadens the financial toolkit and choices available to owners of private companies.
Banks constrained by regulations necessitating caution in risk-taking have curtailed lending activities. In contrast, private investors actively seek new investment channels beyond public markets and have the flexibility to price risk according to their preferences. This dynamic creates unique opportunities for private firms to access additional capital and explore non-traditional objectives, a departure from the conventional preferences of banks.
From our perspective as advisors, the growing efficiency and prevalence of the private capital ecosystem is a meaningful development. They empower us to offer our clients an even broader array of strategies to accomplish their objectives. If a client expresses a desire to preserve their business, maintain control, and continue pursuing their mission without selling the company, private capital can emerge as the optimal solution for fostering growth while safeguarding ownership's control over the company's direction. We can collaborate with our clients, drawing from diverse solutions to help them achieve such goals.
Private capital can eliminate personal guarantees for private owners, reduce amortization burdens, and provide access to additional capital for projects typically unsupported by banks and not aligned with private equity interests. While this option has existed for the largest public corporations for decades, it is increasingly becoming available to smaller firms.
For private company owners, awareness of their options is paramount. Partnering with an investment advisory firm, such as Altmaven, that can attentively assess their preferences and requirements, offering tailored solutions that align with the unique characteristics of their business. Whether a client is contemplating the sale of their family business or seeking personal liquidity, we work together in order to find the ideal solution that aligns with their aspirations. This approach is at the core of our expertise and is an immensely gratifying aspect of our engagement with clients.