How midsize companies raise capital in turbulent times (2023)

Two years ago I wrote a Harvard Business ReviewArticleabout how midsize companies have been underserved and overwhelmed by capital transactions. Today, with all the turmoil in the financial markets, there's a new kind of pressure on midsize companies.

For at least a year, business leaders have been grappling with all sorts of economic warning signs - rising interest rates, falling stock prices, the rising risk of a recession. In times like these, cash is king. You may need it to protect yourself in a storm. or you want money because you have the ability to go on the offensive.

But how to gather these funds? According to the 2022 Annual US PE Average Market Report,Pitchbook, Investment in mid-sized companies by private equity firms has declined over the past 10 years, while lending to mid-sized companies has fallen by nearly 60% in the past year.

Also, you cannot rely on commercial banks for your lending needs, as you probably did. As of 2014, the role of banks in leveraged creditdropped from around 80% to less than 10% of all leveraged loans. And the tendency for non-banks to dominate middle-market lending isgets stronger and stronger.

But even the private debt market of specialist lenders, business development companies (BDCs), family offices and non-bank lenders now faces a major test amid an uncertain economic outlook in 2023. After nearly a decade of rapid growth, private debt may be so higher interest rates rudely awakenedand more restrictive agreementscompromising firms' ability to pay their borrowing costs. These factors, in turn, make investors think twice about their exposure to private debt. Meanwhile, aggressive monetary tightening and the very real prospect of a global recession could also limit business to alternative lenders, as has already happened to private equity firms.

On the positive side, however, investors are raising large amounts of new debt and equity. In early April,Η Wall Street Journal mentionedAssured Guaranty Ltd and Sound Point Capital Management have agreed to join forces on a $47 billion corporate fund to capitalize on high demand from investors looking to put their money into private debt, hoping for higher returns than the stock market offers. Named PE firms also remain bullish on their private lending strategies. In December, private equity firm KKRurging its limited partners to increase their allocation to private debt;and Blackstone's credit armmore than doubledYour assets under management (AUM) over the past five years.

And on the equity side, mid-market PE fundraising held steady at $133 billion in 2020, 2021 and 2022 — versus an average of $95 billion in 2017 and 2018, according to reportsPitchbookUS PE mid market annual report 2022.

What does this mean for midsize companies?

Midsize companies—typically those with annual sales between $25 billion and $1 billion—can no longer rely on the backers of the past to get the best deal. The right offer with advantageous conditionsOf,it could be with an investor or lender that you don't already know.

Recently, an executive at a national accounting firm (40,000 clients with revenues of $50 million or less) told me, “One of my clients, a cash advance brokerage, is securitizing debt. Last year they paid their investors 3.5% interest on the securitized bonds. They are currently doing a deal at 8.5%. So if they advance money to entrepreneurs, the cost for those entrepreneurs will increase.”

The end result is that you will be paying more to raise funds for the foreseeable future. Chances are you will be underserved and saddled with too much capital for months or years to come. And it will affect many companies like yours. AccordinglyNational Center for the Middle Market, on average, about a third of midsize businesses will apply for a loan in any given year.

Three ways midsize companies can raise capital

If you need to secure financing for your business, where do you start looking? Try these three options:

your cycle.

You can start by looking for the best possible deal in your acquaintance circle. But the "usual suspects" may not show up for you. With the impact of the pandemic, inflation and general economic turmoil on the horizon, this old band of financiers has changed. Your local commercial bank, private equity firms, and many non-bank lenders may no longer want to work with you, but you can try to buy.

employee help.

If you're too busy running your business to compare, you can hire someone to shop for you. Hordes of commercial loan brokers and mergers and acquisitions advisors have sprung up since the start of the pandemic to help mid-sized companies navigate the alternatives. You won't struggle to find thousandscommercial loan brokerswilling to charge 2% to 5% to help you find credit. And stock financing brokers, ranging from 4% to 10% to raise capital, are plentiful.

networking and online shopping.

Find the best deal in a tech-enabled marketplace. While nearly all lenders – including banks – offer some sort of online solution to your financial needs, a number of new technology marketplaces have sprung up to help. Purchasing tools likeOpus ConnectEAxialare fundraising networks.capital cerebralallows you to submit your loan application to a pool of nearly 2,000 lenders, approximately 50-50 split between commercial banks and non-bank lenders. Cerebro charges a fee for using its tool in addition to the interest rate you pay the final lender. The same applies toRealAtomEto loan, both aimed at financing commercial real estate. If your funding needs are larger ($50 million or more), there are many consultants and funders to choose from, such as:Mid Cap FinanceEAllianz-Bernstein.

Know what you want and buy smart

While any of these three paths can provide you with the capital you need to grow, there's more at stake than the money itself. Terms, ease of processing, and control of your sensitive information and processing times are important to any successful business. . Circumstances vary and the trade-offs are real, but whichever path you choose, try the following:

• Improve your funding opportunities.Maintain operational efficiency by ensuring you have tight controls and are lean.Alix Partnersindicates a greater likelihood of closing deals for companies with healthy operations.
• Decide on the best conditions.Purchases between alternative fund providers. Shopping helps you compare prices, agreed valuations, warranties, terms and offers.
• Maintain confidentiality and control over the process.Protect your company's confidential information, don't let others pressure you about time or try to steer you into a deal you really don't want.
• Understand your total costs.If you ask a third party for help (brokers, consultants, online tools, lawyers, accountants, etc.), make sure you understand how much you are paying for the help you are getting and who pays the fees.

Under current circumstances, a good deal with fresh capital will no longer be the "cheap money" it used to be. But in many ways, navigating the new fundraising landscape is easier - the resources are generally available to you. You just need to remember to be realistic about what you can get out of a deal, use the best data security available to transmit it safely, and negotiate the terms you're willing to pay. Find a process that works for you - preferably one that is relatively easy and inexpensive for you and your business.