In recent years, alternative financing providers have established themselves as viable alternatives to traditional bank financing. A less appreciated dynamic is the ability to serve as an alternative to private equity capital. These scenarios overlap in situations where management-owned businesses cannot secure adequate bank financing, and dislike the concept of losing economic and strategic control of their company to a private equity sponsor.
Whereas in the past a fundamentally strong company would have sought a mixture of bank financing and equity capital to fuel growth, we are now seeing an increasing appetite for flexible, bespoke financing solutions where the roles of lender and financial sponsor are amalgamated. While this trend is largely driven by the lack of available bank financing, the result can be to provide the borrower with a long term partner who will not only be more inclined to provide funding for strategic expansion than a bank would, but who may also add value to the business on an ongoing basis through its skills and experience, similarly to what a traditional financial sponsor would.
As the lines between lender and financial sponsor begin to blur, the importance of this ongoing added value is amplified. The benefits to the borrower can be akin to the advantages of having a strong private equity backer without the borrower surrendering control of the company. In particular, small and medium sized companies can often benefit from the active governance participation and disciplined financial management brought by an active alternative credit provider as well as the ‘credentialising’ effect that such an investment has on the company.
Finally, given the more flexible and creative approach taken by alternative credit providers, they are more inclined to both finance a company’s strategic growth opportunities and be accretive to the shareholders in exploring strategic options.
These dynamics are part of what has driven Metric Capital’s investments since we started investing our maiden fund in April 2012. Since then we have closed ten transactions in six European jurisdictions spanning industries as diverse as education, healthcare and specialty lingerie. Metric contributes to the governance and strategic management of all portfolio companies through board participation and close working relationships with management teams and entrepreneurs.
This evidences the fact that the value-add brought by Metric as an investor serves to offset the higher cost of capital that we offer compared to traditional bank financing in the minds of management teams and that in certain circumstances a confident management team is better served with a long-term strategic investment by an alternative credit provider than a private equity investment.
Metric Capital’s facilities have the financial covenants one would expect from a lending institution. In addition, we sit on the boards of all of our portfolio companies. In our capacity as board members, we have been involved in helping the companies think through acquisitions, joint ventures in new jurisdictions, strategic and operational initiatives and early stage thoughts on how to best position the companies for an eventual exit.
Our objective is to structure the transactions to protect our creditor position and ensure downside protection, and, at the same time, participate in the growth of the companies through a meaningful equity stake.
Even as banks begin re-entering the market we believe that the proposition of alternative credit providers offers dedicated management teams a viable alternative both to rigid bank financing and to intrusive private equity investments.
John Sinik, former global head of corporate credit at UBS and partner at Towerbrook, is the founder and managing partner of London-based Metric Capital Partners.