As a commercial banker, you pride yourself on serving your clients. But sometimes their dreams just can’t be realized, due to your bank’s restrictive lending guidelines. By introducing your clients to private equity (PE), you can support their growth—and make them a loyal customer.

 

When Debt Capital Isn’t Enough

As a member of your client’s team of trusted advisors, along with an accountant, lawyer, and other professionals, providing banking guidance can be very satisfying. However, debt capital can’t always support growth on its own. For more growth-oriented clients, PE may be the solution. Most small-to-medium companies do not qualify for this source of finance; however, some do.

 

The PE industry offers funding to growing businesses, in return for a slice of equity, an ongoing business mentoring relationship, and a seat on the board. This complex industry includes funds with a range of objectives, such as buyout funds, hedge funds, venture funds, growth capital funds, and dedicated capital from wealthy individuals.

 

How Clients and Investors Benefit From Growth Capital

A PE firm pools money from institutional and high net worth investors into one or more funds, to make investments in what are referred to as “portfolio companies.” At Accent Capital Partners, we specialize in growth equity, and select portfolio companies for their ability to offer exceptional growth potential.

 

The events that trigger the need for growth capital may include acquisition, buying out a partner, or restructuring. The investor not only receives an equity stake, often 40-65%, but also becomes an active member of the board, and may place other professionals with valuable expertise on the board.

 

Characteristics of Companies That Use PE

As a banker, you are well positioned to help your client recognize when their debt-to equity ratio will limit their future growth. However, because PE is not for all firms, it is important to understand the basic underwriting criteria, so that you are not suggesting a transaction that a client may not be able to do.

 

The companies that successfully tap PE have three characteristics in common:

 

1. Their business can be grown rapidly. PE firms demand risk- adjusted rate of return, so a business owner must show growth. The more visible the growth track, the easier it is to raise the capital.
2. Their management is solid. The PE firm must rely on management to execute the agreed-upon growth strategy.
3. Their CEO/Owner must cede some control. It may be possible to sell a minority stake in the business, but that is rare.

 

If your client meets the criteria for PE, he or she will find that it offers flexible financing, ranging from convertible debt to common stock. Your owner may also find that the professional executives who sit on the board or offer mentoring are as critical to the future of the company as the funding.

 

Open Your Client Up to More Possibilities

Introducing your client to PE can be a gateway to a wide range of strategies. He or she can explore acquiring companies, expanding into new markets, or buying out a partner. You can give your client the names of PE firms that may be interested in their industry (without endorsing one), which may jump-start a desire to “test the waters.” PE firms, always looking for companies to sponsor, are willing to connect with companies that meet their basic criteria, and discuss financing growth.

 

Unlike venture capitalists, PE firms specializing in growth equity typically don’t invest in “flavor of the month” industries. Some prefer non-tech, simple companies; others focus on retail, business services, or some other sector they know well.

 

The bottom line is that any company that has a clear path to growth in most industries may find a PE firm willing to invest in its business. That said, most firms specialize in firms of a certain size or in a particular stage of growth.

 

Strengthening Your Position as a Trusted Advisor

Connecting your client with a PE firm does not eliminate its need for your bank’s offerings. In fact, it expands it.

 

Almost all PE transactions involve using additional debt, as the PE firm will be aiming to maximize its return through leveraging the equity it adds. Also, treasury functions are likely to become more sophisticated, so selling other cash management products may be appropriate. With the addition of more equity, professional board members, and a well-crafted growth plan, your client’s credit should improve after a PE transaction. In the long run, private investment increases the role of the banker. You now become part of the team advising a larger, rapidly growing firm. Perhaps the biggest favor you can do for your client is to open him or her to the possibilities that come from thinking outside the box.