SME financing through private debt #3 : Uses
Private debt, which is already widely used abroad (particularly in the UK and Germany) and in France in large companies, is destined, in view of its relatively simple implementation conditions and its characteristics, to develop for French SMEs. Indeed, it makes it possible to finance the growth and development of these companies, within the framework of projects traditionally not covered by banking. Illustrations.
Private debt is a suitable solution for financing needs related to the internal growth of SMEs, such as:
- intangible projects such as research and development, traditionally not financed by banking
- the financing or (re)financing of assets, whether tangible (such as production tools or any tooling), or even intangible, such as software
- organic development, through investment in people (hiring new employees), marketing or innovation actions (e.g. IT spending)
Private debt is also proving to be a solution for financing needs related to the external growth of SMEs, such as repurchasing operations from other entities or sectors, in which debt financing will usefully complement bank and equity financing (« mezzanine » or « unitranch » financing, see on this point our article on private debt typologies here).
Finally, a less well-known hypothesis in which it can be just as effective, private debt can be used as a complement in the context of capital transmission operations:
- Buyout by employees of the SME (MBO - Management Buy Out), in the most frequent cases by Management: In many cases, employee buyers do not have the necessary equity capital to finance their buyouts and must call on external financial partners. The financing, supported by a holding company created for the purpose of the operation, may combine several components, traditional bank loan (« senior debt ») but also private « mezzanine » debt, which proves to be a quasi-capital instrument. The private debt component of the financing, repaid at the end, helps to preserve the SME's cash flow, whose profits are supposed to make it possible to repay the loan. The MBO is particularly suitable for succession operations by managers of a family SME, while preserving continuity thanks to the management in place.
- MBI - Management Buy In, a variant in which the transfer takes place for the benefit of buyers outside the SME: as in the previous hypothesis, a takeover holding company is created, which is intended to enter into the financing transaction, combining equity and private debt.
- OBO - Owner Buy Out, buyout by founders/managers of a minority shareholding: This type of operation, which can be financed entirely by private debt, makes it possible to ensure an exit for certain minority shareholders (business angels or Tepa ISF funds, for example), while at the same time allowing the founders to acquire a stake in the capital of the holding company created for the purpose of the operation. It can also be an opportunity to involve certain non foundational managers/managers, because of their important role within the company, by allowing them to take a share of the capital.