Private Equity Success: How an Asset-Based Loan Rescued a Struggling Portfolio Company

Matt DeBernardo

Last Modified : Apr 01, 2024

Fact-checked by: Bruce Sayer

In the world of private equity, investments often come with the promise of transformative growth and lucrative returns. However, not every investment unfolds as expected, and portfolio companies can encounter financial challenges that threaten their stability and prospects. In this blog post, we’ll explore a revealing case of a portfolio company in a tough spot and how a private equity firm initiated a successful turnaround by strategically utilizing an asset-based loan.

This story highlights the power of an effective turnaround strategy supported by an experienced alternative lender with creative financing solutions. It all added up to successfully reviving a portfolio business facing adversity.

Part 1: The Private Equity Firm and its Portfolio Company

This case involves a prominent private equity firm with a diverse portfolio of investments spanning various industries, including manufacturing, distribution, and consumer goods.

Within the firm’s extensive portfolio lay a mid-sized company in Georgia specializing in producing industrial machinery components. The company had a legacy of over two decades but had recently found itself in financial distress with liquidity challenges that threatened its existence.

The Challenges

The company was facing a trifecta of formidable challenges that had pushed it to the brink:

1. Declining Cash Flow:The company has experienced a consistent decline in cash flow over the past few years, primarily attributed to a drop in orders from key customers, intensifying competition, and a broader industry slowdown.
2. Limited Working Capital:The diminishing cash flow created severe constraints on working capital, hindering the company’s ability to meet operational expenses, purchase essential raw materials, and invest in critical product development initiatives.
3. Bank Loan Constraints: Adding to the predicament, the company already had an existing bank loan with restrictive covenants that effectively locked the company out of additional credit facilities, leaving it stranded in a financial predicament.

Part 2: A Comprehensive Turnaround Strategy

Recognizing the urgent need to address the financial distress at the manufacturing company, the private equity firm swiftly devised and implemented a comprehensive turnaround strategy. The primary objective was to stabilize the company’s financial situation and pave the way for sustainable growth and profitability.

Actions Taken:

Strategic Review: The private equity firm embarked on a thorough strategic review of the company, scrutinizing its financials, operations, and the dynamics of its industry. This meticulous assessment was instrumental in identifying areas of improvement and unearthing potential growth opportunities.

Debt Restructuring: The firm initiated negotiations with the company’s existing lender to restructure the terms of the bank loan. This intricate process involved modifying covenant requirements, extending the loan’s maturity timeline, and securing a temporary increase in the credit line to provide immediate financial relief.

Part 3: The Role of Asset-Based Loans in the Turnaround

Despite the progress made through debt restructuring, the company still faced the pressing need for additional working capital. To address this challenge, the private equity firm explored alternative financing options, eventually landing on the concept of an asset-based loan (ABL) to unlock the company’s latent potential.

The Role of Asset-Based Lending (ABL):

The private equity firm recognized that ABL could be a game-changer for the manufacturing company. This flexible alternative funding option would provide the liquidity the company desperately needed by leveraging its accounts receivable and inventory as collateral.

Key Features of the Asset-Based Loan:

Accounts Receivable Financing: The ABL facility allowed the company to generate availability against their outstanding A/R, bringing much-needed liquidity.

Inventory Financing: In addition to advancing against their A/R, they could also leverage their current inventory. This enabled the company to maintain optimal inventory levels, fulfill customer orders promptly, and ensure operational continuity.

Flexible Terms: The asset-based loan allowed the company to advance weekly against updated borrowing base certificates. This flexibility was essential for navigating the unpredictable terrain of the industrial machinery components market – ensuring that their availability was consistent with their weekly asset balances and working capital needs.

Note: Before the portfolio company took on the new ABL facility, it first exited the existing loan agreement and made the bank whole. Experienced alternative lenders have the expertise to streamline their processes to ensure a smooth transition to the new facility without funding gaps.

Part 4: The Results of the Turnaround Effort

With the support of the asset-based loan, the company embarked on a comprehensive and meticulously executed turnaround strategy. Here are the remarkable outcomes and achievements that ensued:

Stabilized Operations: The immediate cash infusion from the asset-based loan enabled the company to stabilize its operations. This allowed it to meet financial obligations, pay its workforce on time, and continue fulfilling customer orders without disruptive delays.

Enhanced Supplier Relationships: With reliable cash flow, the company improved its relationships with suppliers. It was able to negotiate better terms, secure discounts on raw materials, and optimize its supply chain, further bolstering its financial position.

Debt Management: The debt restructuring efforts and asset-based loan resulted in a more sustainable debt structure. Debt service obligations became aligned with the company’s cash flow, contributing to its overall financial stability.

Investment in Growth: The newfound working capital enabled a strategic shift toward investment in research and development. The company capitalized on this opportunity to develop new products, diversify its offerings, and reach untapped markets, expanding its customer base.

Sustainable Financial Health: The manufacturing company’s financial health improved progressively. It emerged as a more profitable enterprise and an attractive prospect to potential investors or buyers, positioning itself for long-term viability and growth.

Conclusion

This case illustrates how private equity intervention, coupled with the strategic use of asset-based loans can enable the revival of a struggling portfolio company. Through creative financing solutions and unwavering commitment, the private equity firm orchestrated a successful financial turnaround, ultimately securing the future of a business teetering on the edge of crisis.

This example underscores the significant role that asset-based lending can play within the domain of private equity. It highlights alternative lenders’ capacity to provide a lifeline to portfolio companies, empowering them to execute effective turnaround strategies and revive companies facing financial distress. In the dynamic world of private equity, where the unexpected is the norm, implementing creative funding solutions, such as ABL financing, often proves to be the turning point in propelling portfolio companies toward revival and success.

Key Takeaways

• Private equity firms facing the challenges of a portfolio company in financial distress can respond quickly with effective turnaround strategies if supported by flexible funding options.
• Alternative lenders can provide a lifeline to portfolio companies with flexible funding options such as asset-based lending (ABL).
• Asset-based lending can leverage a portfolio company’s accounts receivable and inventory as collateral to provide much-needed liquidity.
• As seen in this example, ABL financing can prove to be the turning point in propelling portfolio companies toward revival and prosperity.

Matt DeBernardo

Matt DeBernardo, SVP, Business Development Officer, is an accomplished finance professional with over 15 years of experience in alternative finance. In his role, he is responsible for structuring creative, flexible asset-based lending solutions that maximize working capital.

Prior to joining eCapital, Matt held senior positions at Alterna Capital and LSQ, where he was a top producer. His commitment to the alternative finance industry is evident in his active participation in the Secured Finance Network as a board member for the Florida chapter, and a member of many other industry organizations such as the Association for Corporate Growth and the Turnaround Management Association.

Matt earned a Bachelor of Science degree (honors) in Finance from Bentley University and is a graduate of the General Electric Financial Management Program.