Equity funding: Investment for growth as an alternative to debt

Richard Ellis

Even following the unprecedented action taken by government and the introduction of schemes such as CBILS and the Job Retention Scheme, short-term liquidity and access to funding remains the major issue for many businesses, says By Richard Ellis, director at Clearwater International

Progress on these schemes is slow with the challenges faced by banks in managing the huge demand for these schemes and dealing with their existing client portfolios, resulting in delays for businesses during a time of critical need.

Before coronavirus, the answer to these liquidity issues could be traditional bank debt. The typical structure of which, with capital repayments and resulting pressure on cashflow, means they may not be appropriate at this time. Businesses may therefore need to seek an alternative funding solution. Equity investment could be the answer, to not only address short-term liquidity issues but also ensure businesses are ideally placed to capitalise on future opportunities.

While selling a stake in a business is a big decision, the introduction of equity finance can provide a number of benefits beyond cash. Accessing equity capital should provide a faster route to funds with investors having the ability to currently move more quickly than banks. There are also operational cashflow advantages to equity investments which are usually in the form of long-term instruments and typically have no requirement to be repaid until a future liquidity event (sale of the business, refinance etc.).

An equity investor will also bring further expertise and support through its team of experienced investment professionals, non-executive directors and external contacts. This can add real value, especially in these uncertain times, and can encompass anything from strategic input at board meetings, to acquisition support, portfolio benchmarking and sharing operational best practice. Access to this support network and growth capital can ensure businesses are best placed, when the time is right, to capitalise on organic growth opportunities or have the financial firepower to pursue an active M&A strategy ahead of their competitors.

While the priority for private equity is currently managing their portfolio investments, there are still record levels of funding that needs to be deployed. Through our recent conversations with a number of investors we know that, even despite the current climate, there is a strong appetite from them to continue to invest in good businesses and back strong management teams.

At Clearwater we have strong relationships across the private equity landscape and have seen first-hand how they are implementing creative structures to accommodate the uncertainty of COVID-19. We know there are investors ready to engage with businesses to help them access flexible funding solutions to strengthen balance sheets, provide development capital or accelerate growth.

 

 

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