Unlocking Value: The Case for Private Equity Firms Partnering with Alternative Finance Companies
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The past few decades have seen very positive returns for many private equity firms across North America. And for the first six months of 2022, private equity firms continued their heightened deal activity extending the industry’s 2021 record-breaking performance – then everything changed!
In June 2022 the US central bank issued the first in a series of interest rate hikes that significantly altered the lending landscape. A seismic shift in the credit market took place as inflation persisted, bank failures resulted in tightened credit from regulated sources, and public market valuations fluctuated and declined. Banks and traditional lending sources pulled back from funding leveraged transactions prompting private equity firms to adjust strategies. Despite these difficulties, the private equity sector demonstrated resilience with innovative approaches to navigate financing gaps and complete deals.
However, financial strategies in the private equity sector may become even more challenged in 2024, as conditions and projections are becoming less predictable. While some anticipate increased activity amid a more favorable borrowing environment, others expect a year of relatively low activity. In this environment, flexible strategies to maximize returns and reduce risks may become even more crucial for creating and seizing opportunities. One such emerging strategy involves partnering with alternative finance companies.
In this blog post, we will delve into why private equity firms are embracing such partnerships, and then we’ll explore the benefits and opportunities that arise from this collaborative approach.
Extending resources and expertise to optimize results
To better explore the rationale behind partnering with alternative finance companies, let’s first review the purpose and goals of private equity firms.
Private equity firms foster economic development and business growth by injecting capital, providing operational expertise, and offering strategic guidance to their portfolio companies. By leveraging their extensive networks, they are able to facilitate access to valuable contacts and markets and can often drive efficiency improvements through their knowledge of best practices and the application of technology upgrades. With a long-term focus, these firms aim to enhance the performance and value of the businesses they invest in and generate favorable returns for investors.
To achieve these lofty goals, private equity firms apply business acumen with financial proficiency, which often means accessing greater financial resources than their portfolio companies can accomplish independently. One such pathway is to partner with flexible alternative lenders. By leveraging the resources of lenders experienced in serving businesses across multiple industries, private equity firms can extend their financial resources and expertise to optimize results.
Understanding Alternative Finance Companies
Alternative finance companies represent a diverse range of financial institutions and fintech firms that offer non-traditional financing solutions. These solutions can include asset-based lending, and invoice factoring, among others.
Alternative finance companies have gained popularity in recent years due to their flexibility and expertise. With easy qualification requirements, minimal lending covenants, and tailored solutions, alternative lenders can address the financing needs of small and medium-sized businesses (SMBs) that may face challenges in obtaining traditional bank loans. Leveraging extensive industry experience, the best alternative lenders are well-equipped to anticipate, react, and solve potential roadblocks that may affect capital management. Additionally, their relationship with clients and networking connections throughout various industries position them to collect and analyze data that would otherwise be inaccessible. The result is additional access to valuable intelligence to inform strategic decision making.
Why Private Equity Firms Partner with Alternative Finance Companies?
A partnership between a private equity firm and an alternative lending company provides an array of benefits, including the following:
- Access to Diverse Capital Sources
Private equity firms typically raise capital through a limited partnership structure. As credit regulations increase and the appetite for risk by conventional lenders diminish the availability of capital from traditional sources can be restricted. Partnering with alternative finance companies allows private equity firms to tap into broader capital sources. Diversifying their funding sources can provide greater flexibility in structuring deals and mitigating the risk of capital constraints.
- Risk Mitigation
Relying on a single source of capital can expose a private equity firm to increased risk, especially if that source becomes constrained or faces challenges. Diversification allows firms to access capital from various channels, reducing vulnerability to market fluctuations, economic downturns, or changes in investor sentiment. Partnering with alternative finance companies can serve as a risk mitigation strategy to enhance financial resilience and flexibility, providing a buffer against unforeseen challenges in the financial landscape.
Additionally, alternative finance companies often have expertise in assessing and managing credit risk, which can complement the due diligence capabilities of private equity firms.
- Flexible Financing Structures
Alternative finance companies are known for their flexibility in structuring financing deals. Private equity firms can leverage this flexibility to tailor financing solutions that meet the specific needs of their portfolio companies. Whether it’s providing growth capital, refinancing debt, or funding acquisitions, alternative finance companies can offer bespoke solutions that traditional lenders may be unable to match.
Also, once financing is established, terms can be reviewed and revised to accommodate additional capital needs as the business grows.
- Speed and Efficiency
Private equity firms often require swift access to capital to execute their investment strategies effectively. This need for fast funding is often unfulfilled when dealing with conventional lenders. Traditional financing institutions typically follow extensive protocols involving thorough documentation, credit checks, and complex approval procedures. These processes can result in a prolonged timeline before borrowers receive a decision and access to funds. On the other hand, alternative lenders are well known for their speed of funding. Their streamlined processes, use of technology, and focus on specific criteria (such as cash flow or collateral) enable quicker decision-making compared to traditional banks. Alternative lending approvals are often measured in days rather than weeks or months with onboarding and first funding normally completed shortly thereafter.
- Enhanced Deal Origination
On the other side of the coin, one of the primary challenges for private equity firms is finding attractive investment opportunities. Alternative finance companies often have extensive networks and platforms for deal origination. Collaborating with these firms can open new channels for sourcing potential investments. Whether identifying promising startups or gaining access to unique lending opportunities, private equity firms can benefit from the deal flow generated by alternative finance companies.
- Innovation and Technology
The financial landscape is rapidly evolving, driven by technological advancements, and changing consumer preferences. Alternative finance companies are at the forefront of this transformation, leveraging technology to create innovative financial products and services. Partnering with these firms can enable private equity firms to harness the benefits of technology-driven solutions to enhance their investment strategies and portfolio management.
- Access to Niche Markets
Private equity firms looking to invest in specialized sectors or emerging markets can leverage alternative finance companies’ willingness to fund endeavors in niche markets and industries that may be underserved by traditional lenders. In addition, these lenders often possess expertise and market knowledge to help identify and capitalize on unique opportunities.
Conclusion
In an increasingly dynamic financial landscape, many private equity firms are adapting and exploring new avenues to achieve their investment objectives. Partnering with alternative finance companies offers many benefits, ranging from access to diverse capital sources and enhanced deal origination to flexible financing structures and risk mitigation. Moreover, the synergy between private equity firms and alternative finance companies can unlock innovative solutions and technological advancements that drive growth and create value for both partners.
As the financial ecosystem continues to evolve, private equity firms that embrace collaboration with alternative finance companies will be better positioned to thrive in an ever-changing market, maximize returns, and deliver value to their stakeholders. By strategically leveraging these partnerships, private equity firms can continue in enhancing the performance of their portfolio companies, and ultimately generate profitable returns for their investors.
Key Takeaways
- Economic conditions and projections for 2024 are unpredictable. In this environment, flexible strategies to maximize returns and reduce risks in the private equity sector remain crucial for creating and seizing opportunities.
- Partnering with flexible alternative lenders experienced in serving businesses across multiple industries provides extended resources and expertise to optimize results.
- The synergy between private equity firms and alternative finance companies can unlock innovative solutions and technological advancements that drive growth and create value for both partners.
- Private equity firms that embrace collaboration with alternative finance companies will be better positioned to thrive in an ever-changing market, maximize returns, and deliver value to their stakeholders.
ABOUT eCapital
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.
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.