Banks and debt funds fight for SMEs

Private debt stands for the provi­sion of debt capi­tal by insti­tu­tio­nal inves­tors outside the capi­tal market and is incre­asingly seen as a substi­tute for tradi­tio­nal bank finan­cing. Private debt funds focus on products and situa­tions that have become unat­trac­tive to banks due to regu­la­tion. Finan­cing instru­ments that typi­cally fall under private debt are long-term senior loans, unitran­che, i.e. finan­cing with both senior and subor­di­na­ted compon­ents, mezza­nine & near-equity instru­ments, receiv­a­bles secu­red by real estate or special corpo­rate situations.

In the recent past, it has been obser­ved that private debt funds incre­asingly offer as wide a range as possi­ble of the finan­cing spec­trum outlined above. The advan­tage of these specia­li­zed funds is usually the grea­ter flexi­bi­lity of the finan­cing instru­ments and the asso­cia­ted ability to respond to a company’s indi­vi­dual finan­cing situation.

The VALINFUNDS fund plat­form initia­ted and mana­ged by IKB acts as a link between insti­tu­tio­nal inves­tors such as insu­rance compa­nies and pension funds and German SMEs. With a total commit­ted capi­tal of appro­xi­m­ately EUR 600 million, VALINFUNDS offers attrac­tive private debt finan­cing solu­ti­ons. The platform’s funds each focus on one finan­cing instru­ment and curr­ently offer senior loans with terms of up to 10 years, for which block matu­rity is possi­ble, as well as mezza­nine capi­tal with terms of up to 7 years. The two funds have so far successfully imple­men­ted 13 finan­cings and inves­ted over 200 million euros.

The mezza­nine fund focu­ses on estab­lished German SMEs with sales of around EUR 40 million or more. The indi­vi­dual invest­ment per company is usually between EUR 3 and 10 million. The finan­cing occa­si­ons are multi-laye­red and cover, for exam­ple, clas­sic growth finan­cing, liabi­lity restruc­tu­ring and acqui­si­tion finan­cing, as well as share­hol­der chan­ges and the streng­thening of the capi­tal structure.

The senior debt fund focu­ses on estab­lished German medium-sized compa­nies with sales of appro­xi­m­ately EUR 200 million or more and EBITDA of EUR 15 million or more. The indi­vi­dual invest­ment per company is usually between 5 and 50 million euros. Typi­cal finan­cing occa­si­ons are growth, acqui­si­tion and follow-on finan­cing, and the fund does not require that finan­cing be earmarked for a speci­fic purpose.

Senior debt funds often provide long-term debt capi­tal. This can be colla­te­ra­li­zed as well as parti­ally unse­cu­red. Because it can be struc­tu­red indi­vi­du­ally, private senior debt can be better tail­o­red to a company’s finan­cing needs than capi­tal market products such as bonds. Very often, senior debt is embedded in over­all finan­cing struc­tures as a long-term, frequently bullet-matu­rity compo­nent. This can signi­fi­cantly reli­eve the repay­ment structure.

Mezza­nine capi­tal often comes into play when clas­sic types of finan­cing reach their limits. Even today, banks find it diffi­cult to finance share­hol­der buyouts, for exam­ple. The most common reason, howe­ver, is proba­bly that the debt capa­city for clas­sic senior capi­tal has been reached and a “gap” in the finan­cing still needs to be closed. Many entre­pre­neurs also see mezza­nine capi­tal as a kind of “war chest” to enable them to react flexi­bly to oppor­tu­ni­ties arising in the market with acqui­si­ti­ons or expansion.