Private capital is a very old concept, having emerged during the middle ages from the Florentine merchant banking community. Of course, private capital as we know it today is a little different, and a little more refined than it was when it first began.
Hundreds of years ago, European merchant ships would travel to the Americas to gather trading goods. Outfitting a ship with crew and supplies cost money, so expeditions were made possible with an investment from a wealthy sponsor. When the sailing ship returned with its cargo, the ship’s captain would be paid a carry (or carried interest), a percentage of the cargo’s value, while their sponsor would get a larger majority percentage. Think: 20 percent to the captain, 80 percent to the sponsor.
The sponsor’s initial investment funded the ship’s expedition, and the value of the goods they received when the ship came back was their return on investment (ROI). Sponsors would fund expeditions that they thought would be profitable. The early sea trade is where the term “carry trade” is thought to have evolved from.
Over time, the practice spread from shipping to other areas of commerce, with wealthy families working with agents and investing capital in different ventures.
The practice became somewhat more formalized in the mid-20th century, after World War II. This is when we saw the emergence of the three main branches of modern private capital – venture capital, private equity, and private credit.
Venture capital is a dilutive type of investment in which shareholders of companies that have no revenue seek out investors and sell shares to cover the costs of starting or growing a business. Venture capital can fund activities such as:
- Hiring employees
- Securing a space to do business
- Developing internal systems and processes
- Producing saleable goods
Once the company becomes profitable, the investors can be paid returns. In some cases, a venture capital funded company will be acquired by a larger corporation or float an IPO (Initial Public Offering) once it passes a certain threshold of revenue. Some of the proceeds of the sale may go to the initial investors.
Private equity is similar to venture capital in that it is also dilutive to the existing shareholders. In this case the businesses seeking funds are already established, and need the extra money not to start up operations, but to finance acquisitions, mergers, and other growth efforts.
With private equity, investors are purchasing shares in a private company, and that comes with some power over the company’s overall direction and management. Private equity investors have a say in how and when their money is put to use, and they have a carried interest motivation to grow the company to achieve a higher valuation.
Private credit (also known as private debt) is also used to fund mergers, acquisitions, and growth initiatives, but unlike private equity and venture capital, it is anti-dilutive for the shareholders. A private credit lender does not take on common share ownership of the company and therefore does not have any direct control over the company’s direction or growth. This can be advantageous for companies that are taking on manageable risk, have tangible enterprise value, don’t have a lot of tangible assets, and want access to capital without giving up control or bringing on a minority partner with control rights.
Of the three branches we’ve discussed, private credit is the most “DIY” – unlike with private equity or venture capital, recipients of private credit investments are independent when it comes to determining how and when to allocate the funds.
What Does Bond Capital Do?
At Bond Capital, we specialize in private debt, and alongside that private debt, private equity.
When it comes to private debt, we participate in what’s called the lower middle market, dealing with transactions between 5 and 50 million dollars and corporate revenues between 10 million and 1 billion dollars.
The types of businesses that may benefit from issuing private debt are unable to access public markets and are underserved by government relief or their existing banks. This can be for a variety of reasons.
Banks are conservative and tend to prefer hard assets when it comes to business financing. If your business’ equity value based on cash flow or intellectual property exceeds its asset or book value, it can be more difficult to get funding from banks. Individual banks also have their own regulated borrowing rules, and since it’s often a headache and time-consuming to change banks, some business owners find it easier and faster to seek out a private credit financing.
Let’s Talk Private Credit
Do you have a business in need of funding? Before you approach Bond Capital or any other private debt lender, you need to have a big dream expressed in a clear business plan. State the amount of money you require to see your plan to fruition and illustrate your ability to overcome risk factors while acting as a good partner and steward. Be prepared to explain your track record, how you’ll allocate the investment funds, and why your business will be successful.
Ready to take your business to the next level? Looking for more information? Contact us today.