$778 billion of new capital flowed into private assets in 2018, with global private equity net asset value growing by 18% during the year and by a staggering 7.5 times since 2000. Investing in private companies has changed a lot over the last 20 years and is now much more competitive with nearly 9,000 active private market firms.
This growing competition continues to drive innovation and efficiency across the industry, both in terms of portfolio company management and value creation.
Traditional equity and debt financing are widely available at portfolio company level but what new and innovative financing options are available at the fund/portfolio level or to the management company? What options are available to improve the capital structure of private equity funds or holdings, whether to make follow-on investments into portfolio companies or to create liquidity without losing control or upside of such portfolio companies.
Preferred equity is a little known and under-applied option for many of the challenges and opportunities, that investors in private assets face across different economic cycles. Preferred equity financing has a lower cost of capital than ordinary equity and is significantly more flexible than debt capital.
In this update, we hope to give you an insight into some of the ways our clients have made use of our flexible financing.
Statistics from McKinsey Global Private Markets Review 2019.
Growth capital for single portfolio companies can be difficult to source or prohibitively expensive. In such situations, raising financing across a portfolio of companies is often a more flexible way of funding specific follow-on investments at competitive pricing.
Managing shareholders expectations
As portfolio companies mature, their borrowing capacities improve, but exit timing can still be remote. Portfolio financing can be used to satisfy end investors need for liquidity while allowing the investors to hold portfolio companies until the right exit opportunity.
Alternative to selling a stake in the management company
We have seen a significant rise in the sale of equity at management company level to third party investors. This can be for a variety of reasons, such as succession planning or partial exits for founders. Preferred equity is an alternative option, providing unconstrained financing that avoids dilution of shareholders.
Financing management company/employee co-investment commitments
With each new fund raise there are additional, and usually increasing, requirements from investors for the management company/senior employees to increase their co-invest levels. Preferred equity can help teams finance their future co-invest strategy, based on current co-invest holdings and possibly on existing carry.
Optimising the capital structure
Financing at the portfolio level will provide more flexibility to fast growing companies in terms of cash management, but also in terms of covenants and maturity. A typical preferred equity structure will not have cash-pay interest, restrictive covenants or a fixed maturity.
Permanent capital funds
Preferred equity is an obvious choice for closed end or fixed pools of capital as a way to add additional fire power to fund new or existing investments.
Investors in portfolios of LP interests have used preferred equity financing to both accelerate future distributions from their fund portfolio and/or to fund capital calls arising.
For 11 years, 17Capital has been providing financing to their clients, all of them private equity investors with outstanding track records. Whether to fund new investments, or to send dividends to shareholders, 17Capital always focuses on helping investors optimise their capital structure and achieve their ambitions.
With $2 billion invested in Europe and North America, and a team of 38 professionals between London and New York, 17Capital has unparalleled experience of financing private equity portfolios. 17Capital pioneered the use of preferred equity with portfolios of private equity investments, whether for direct investors, funds, or other firms that invest in private companies, and continue to lead the way in this new segment of the alternative asset management industry.
Preferred equity is flexible, unconstrained and non-dilutive capital with typically no maturity, security or covenants. 17Capital is the global “go-to” source of preferred equity financing for investors in private assets.Contact us
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