Hybrid structures: combining private debt & private equity

Entrepreneurs often stand at the crossroads of having to decide on the optimal way to finance their growth plans. How much debt can be used? How much equity to attract? What is the ideal mix and who is the ideal investor?

This is a pivotal moment, as the financing structure will not only affect the future cashflow of the company but can also impact the ownership and therewith the degree of control of the entrepreneur. Most importantly, the type of financing will determine the extent to which the entrepreneur can profit from the value creation that is realized en route of the growth path. Hence, it is key to consider different structures and their tradeoffs to be well-positioned for the future.

 

Private debt – OR – private equity? Hybrid!

Private debt and private equity investors provide companies different financial means to the same end. In short, private debt provides entrepreneurs the additional leverage needed to realize their growth plans, acquisition strategy or management buy-out and can be combined with bank financing. The dilution is very limited, there is no impact on governance and profit from future value creation is retained by the entrepreneur. However, the cost of debt in the form of interest coupons & repayments have financial impact on the entrepreneur’s operational business.

The other end of the financing spectrum entails private equity, which also fuels the entrepreneur’s growth or acquisition strategy. By selling shares, entrepreneurs can minimize the financial impact on their operational business. In exchange, however, entrepreneurs agree to dilution and decrease of control. Therewith, the entrepreneur can profit less from future value creation of the growth plans.

Since the cost of capital of private debt is lower than the cost of capital of private equity, private debt can be regarded as expensive debt (compared to bank debt), but a cheap form of equity. Read more about private debt and how it relates to private equity and bank financing in this article.

In general terms: the pros of using private debt are the cons of using private equity, while the pros of using private equity are the cons of using private debt. It is in the interest of entrepreneurs to choose a financing structure that is compatible with the growth strategy – and obviously not the other way around. The right financing structure therefore depends on the strategy and often does not lie with choosing either a pure debt or equity solution.

The advantages of debt might be desirable in certain strategies, while the advantages of equity might be desirable in others. Combining the two can yield an optimally balanced structure.

Hybrid financing structures combine both private debt and equity and allow entrepreneurs to choose their optimal balance between the advantages and disadvantages of using private debt and equity. Hybrid financing structures can be tailored to the strategy of the entrepreneur.

 

Pride Capital Partners as one-stop shop financial partner

At Pride Capital Partners, we provide hybrid capital to companies active in the Software and IT industry in the Benelux, DACH region and in the Nordics. We act as a one-stop-shop financial partner for companies who are looking to raise capital to finance their growth plans.

We are specialized in three transaction types: management buy-out, acquisition finance and growth finance. Read how the flexibility of hybrid capital help entrepreneurs in these transactions:

 

 

This is the first in a series of articles we will publish on the dynamics and advantages of the hybrid capital solution of Pride Capital Partners. Subsequent articles will dive deeper into our hybrid solution and, amongst others, will illustrate its dynamics with a practical case!

Are you curious to find out more about our hybrid structure and whether it fits your company’s growth strategy? Do not hesitate, call us or shoot us an email.

 

Nick Bootsma
Pride Capital Partners
nick@pridecapital.nl
+31 6 3007 3079

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