Feb 19, 2021

Liquidity powers the growth ambitions of mid-sized companies

Ask any major shareholder in a mid-sized company and they will tell you one of the biggest hurdles to their company’s growth is the difficulty they often encounter in securing liquidity. They will also tell you that being able to raise flexible, non-dilutive capital can transform businesses and, by doing so, the legacies of family-owned enterprises.

At its most impactful, medium-term liquidity can be the catalyst for an effective transfer of value from one generation to the next. But how to access liquidity remains a persistent question. 

Mid-sized companies’ difficulty in doing so is a serious problem for economies everywhere. Research by the European Central Bank, for example, reveals that access to lending is a significant challenge for a substantial share of small and medium-sized enterprises and that gaps remains between the needs of these companies and the funding available in the market.[1]

Flexible and transformative funding

A leading provider of private capital solutions, EquitiesFirst has developed an innovative approach to providing liquidity for long-term investors, entrepreneurs and listed companies. Through a sale and repurchase transaction structured as a non-recourse loan, a major shareholder can pledge a portion of its holding as collateral for an injection of capital.

The tenor of such a deal is typically three years and the borrower typically receives between 60% to 65% loan-to-value (LTV) and pays fixed interest rates in the low single digits. EquitiesFirst will lend against the collateral shares while holding them in its own proprietary portfolio. For the duration of the loan, this makes EquitiesFirst a co-investor in the shares alongside the borrower. The same number of shares will be returned to the borrower when the loan is repaid. During the life of the transaction, the original shareholder retains exposure to the performance of the shares and the right to receive dividend payments.

Unlike many traditional lending arrangements, the flexible liquidity obtained through this kind of equity-backed financing does not stipulate how the capital must be used. The shareholder may loan the proceeds to the company, which is free to decide how best to deploy the funds in meeting its particular needs. Not all may choose to invest in growth; KPMG notes that during the Covid-19 pandemic, many small and mid-sized enterprises facing lost income are simply looking for capital to weather the storm until the economy recovers.[2] An equity-backed loan can help protect the legacy, as well as build on it.

Value transfer

In situations where the company is family-held, loans of this nature can be used to achieve a transfer of value across the generations.

Typically, the first generation has built a successful business – often in traditional sectors – into which the family’s wealth is locked in the form of shares. An equity-backed loan can harness the value in these shares to generate liquidity. This liquidity is, in turn, invested in the second or third generation’s new ventures, perhaps in an acquisition or in research and development. It then becomes equity itself, potentially in “new economy” sectors such as technology or healthcare where successful business models can generate very attractive returns.

In this kind of scenario, the equity-backed loan is the catalyst for a chain reaction in a family-owned company. It allows the vision and achievements of previous generations to finance entrepreneurs in the next generation as they chart a course for the future. Flexible, non-dilutive and attractively-priced, the loan can enable the stewards of a family business to pass on an enhanced legacy. For the owners of mid-sized companies that are underserved by conventional lenders, this potential surely makes equity-backed lending a compelling option to consider.

Disclaimer

The foregoing is intended solely for qualified, professional investors, as may be required by law, and is not intended for, and should not be used by, persons who do not meet the relevant requirements. Information provided herein is for information purposes only and does not constitute an offer to sell (or solicitation of an offer to purchase) the securities or investments referenced herein, or provide any particular advisory services (“Offer”). Any Offer shall only be made through the relevant offering or other documentation which sets forth its material terms and conditions. The foregoing does not provide or purport to provide investment advice and has been prepared by Equities First Holdings, LLC and its subsidiaries (together, “EquitiesFirst”) based on or derived from sources EquitiesFirst reasonably believes to be reliable. EquitiesFirst has not independently examined or verified the information provided herein and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. Where figures refer to simulated past performance, that past performance is not a reliable indicator of future performance.


[1] https://www.ecb.europa.eu/pub/economic-bulletin/articles/2020/html/ecb.ebart202004_02~80dcc6a564.en.html#toc2

[2] https://home.kpmg/xx/en/blogs/home/posts/2020/04/banks-balance-surge-in-sme-business-loans.html