Mittelstand Bonds Booming — Are They Competing with Private Equity?

For a long time, it was difficult for smaller medium-sized companies to access the capital market by issuing a bond. Interestingly, this has changed in the wake of the financial market crisis. For many companies, the crisis has severely strained relations with their principal bank. As a result of banks' reluctance to lend, more SMEs have approached the capital market directly in recent years. This solution, which was born out of necessity for some issuers, has now developed into a much-used and established instrument of corporate financing. At the same time, special segments for SME bonds were created on all major German stock exchanges.

Equity or debt capital?

A fundamental distinction must also be made between equity and debt instruments in the financing of medium-sized companies. The equity capital, which in medium-sized companies is often in the hands of a family, is fully liable for any losses incurred by the company, but also participates in full in the profits.

In simple terms, equity is the portion of the liabilities side of the balance sheet that remains after offsetting all receivables and liabilities. Abstractly, it represents the contribution to be made by the owners of the company. The equity investors own the company and are also responsible for its management or the appointment of competent managers. Among other things, the ownership structure of the equity is decisive here. Whereas in the case of a polypolar structure external managers are most likely to run the company, in the case of a single owner or a numerically smaller owning family a family member is often the managing director of the company.

Borrowings are generally fixed-term and callable. It establishes a remuneration claim of the capital provider against the issuer and is accordingly not liable. In contrast to equity, the risk of default is significantly lower here, while at the same time there is no ownership of the company. On the debt side, the traditional financing instruments available to SMEs were bank loans and junior loans, supplemented by invoice and factoring products. In addition, there has been an increase in promissory bills and also corporate bonds in recent years. These instruments can be distinguished primarily in terms of their seniority and thus the risk of default.