If you’re a CFO who is faced with delayed growth plans, making cutbacks and a sales forecast shifting to the right, you may think your choices are limited.
But the reality is, despite the crisis, there are still investors committed to supporting tech companies through the peaks and troughs of scaling a tech business.
For instance, did you know that despite coronavirus uncertainty, technology investors Insight Partners has raised $9.5bn for its newest and largest fund yet?
At this point you realise, now is the time to get options on the table.
To help you get started, here’s what you need to know about the private debt market.
What is private debt?
Private debt is a term given to debt investments not financed by banks or traded in an open market.
You may also hear private debt described as alternative debt, direct lending or private credit.
Typically, the people who run private debt funds have strong backgrounds in commercial banking.
Better still, many focus on niches and have expert knowledge of the markets in which they work.
How did private debt come about?
After the 2008 global financial crisis, bank lending to mid-market companies shrank because bankers had to repair their battered balance sheets and contend with stringent new regulations.
So alternative financiers, including private debt funds, stepped in to fill the gap.
And fill the gap they did. In a report titled: ‘The Rise of Private Debt as an Institutional Asset Class‘ ICG tells us: “In the US, “non-bank debt accounts for 75% of total corporate lending, compared to 10% in the Eurozone and 28% in the UK.”
It added: “Private debt is growing in the UK and Europe as investors realise its strong returns.”
Elsewhere, in its <Alternative Lender Deal Tracker Spring 2019 report, Deloitte link to report states: “Surveys show that the private debt asset class as a whole is forecast to hit $1.4 trillion globally by 2023, passing real estate in becoming the third-largest alternative investment asset class after hedge funds and private equity.”
What makes private debt attractive to tech companies?
Private debt makes it easier for tech company CFOs to raise finance to support a specific need. For example, time sensitive and capital intensive M&A activities.
But that’s not all. Private debt relieves some stress placed on tech company CFOs who need to raise finance during the turbulent global economic and political environment. During these times, banks have little appetite for risk.
What are the advantages of raising private debt over bank debt?
First off, private debt funds can provide more flexible loan structures. In direct contrast to bank lending, private debt funds can offer unsecured options. They also consider non-amortisation loans.
Then because many private debt funds focus on sector niches, they can provide less restrictive terms, including less stringent covenant packages.
After that, close access to decision-makers means private debt funds can shorten credit processes and increase the speed of execution.
Unlike bank lending, private debt funds do not restrict your use of funds.
Beyond that, you can use private debt to replace, top-up and complement existing finance facilities.
Most compellingly, private debt allows companies to access more significant loan amounts without diluting equity.
For what purpose do tech companies use private debt?
During these unprecedented times, you can use private debt to:
- Manage your cash burn rate
- Set up working capital buffers
- Maintain your liquidity
- Get funding to weather inflection points and make strategic pivots where necessary
How can tech companies access the right private debt funds?
In its Alternative Lender Deal Tracker Spring 2019 report, Deloitte noted: “The private debt market can be overwhelming, with numerous complex loan options offered to borrowers.”
To find the right private debt fund, and structure the right private debt finance deal consider talking to a specialist private debt brokerage firm.
It is in a specialist private debt broker’s interests to find and close private debt finance deals with minimum strain on your time and resources.
So it all adds up to this
If you’re worried about a sales forecast shift to the right, and lack of funding available, then talk to a specialist private debt broker.
With their help you can ready your war chest to help you to deal with the unprecedented changes in the business environment.
In particular, a private debt broker can get you options on the table to help you to maintain your cash runway, liquidity and make strategic pivots where necessary.
Trust me; you’ll be glad you did.