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Unlocking Alternative Growth Capital – A Comprehensive Guide

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In the recent webinar hosted by Kaplan CFO Solutions, leading experts convened to demystify the landscape of alternative growth capital. This white paper distills their insights, providing a roadmap for businesses seeking non-traditional funding avenues.

Watch the Recorded Webinar

Introducing Alternative Capital: What It Is and How It’s Used

Insights from Chris Renno, JACS Capital

Renno introduced JACS Capital’s focus on equity investments in early-stage companies, emphasizing the thematic interest in healthcare and energy sectors. “Investing at the stage where we invest, the focus is largely on the founder, the team, and the idea,” he noted, underlining the importance of strategic value beyond capital.

John Stanier, Hancock Advisors (FKA – Clarity Capital Advisors) on the Use of Alternative Capital

“Alternative capital is used from the startup phase, through growth, to mature companies looking for exit strategies,” Stanier explained. He detailed various financing stages, from common equity in startups to preferred equity and mezzanine debt in more mature ventures.

Logan Trotter, Salem Investment Partners on Timing and Purpose

Trotter’s expertise shone through as he discussed when businesses should consider alternative capital. “It’s about growth, acquisitions, and shareholder transitions,” he said, clarifying that mezzanine debt is particularly suited for businesses outgrowing traditional bank lending options, with emphasis that understanding the purpose of alternative capital is key to leveraging its benefits effectively.

Beyond the Money: Choosing the Right Investor

Chris Renno underscored the significance of selecting an investor who brings more than just capital to the table. Strategic industry knowledge, a long-term commitment to growth, and a partnership approach were highlighted as critical factors in choosing the right capital partner.

Navigating the Terms: Equity Investments and Covenants

The panel tackled the complexities of investment terms. Renno discussed the nuances of SAFE agreements, convertible debt, and priced equity rounds, stressing the importance of clarity in investment conditions to avoid future conflicts.

Exit Strategies and the Impact of Third-Party Capital

Discussing exit strategies, Trotter elucidated, “Third-party capital changes the dynamics of exiting a business.” He emphasized understanding how various forms of capital would impact the exit process and eventual returns.

Open Q&A Session in Unlocking Alternative Growth Capital

A significant portion of the discussion was dedicated to a Q&A session, where participants sought tailored advice from the panel of experts. Here, we delve into the detailed exchange that illuminated the pragmatic aspects of sourcing and managing alternative growth capital.

Addressing Seasonal Cash Flow in Construction: Jen’s Inquiry

Jen presented a common yet challenging scenario faced by small construction companies: managing cash flow through seasonal projects. With a revenue of $3.5 million and a history spanning 35 years, her company’s struggle to secure a line of credit led them to use Merchant Cash Advances (MCAs), an expensive alternative.

John Stanier’s Response: Stanier empathized with Bolton’s predicament, acknowledging the difficulty in navigating cash flow issues, especially when traditional lines of credit are hard to come by. He suggested local banks as a potential, albeit challenging, avenue for managing seasonal working capital flows and cautioned against raising equity for such needs due to its mismatch with the problem’s nature.

Chris Renno’s Insights: Renno pointed towards the emerging trend of high net-worth individuals considering private credit as a feasible solution, offering a potentially less expensive and more agile option than MCAs. He emphasized the critical observation that Bolton’s business, despite its longevity, wasn’t exhibiting significant growth, hinting at the need for a tailored approach to funding.

Emergence of Private Debt Capital: The discussion then shifted towards the increasing visibility of private debt as an alternative capital source. Stanier observed a growing pool of capital, both institutional and from private investors, seeking yield in private debt investments. This trend suggests a widening landscape for businesses seeking flexible financing solutions.

Bank Preferences in Working with Mezzanine Debt: Joe’s Question

Joe raised a query about the compatibility of banks with mezzanine debt, particularly in the context of subordination agreements or intercreditor agreements, and whether certain bank sizes are more amenable to working alongside mezzanine lenders.

Logan Trotter’s Perspective: Trotter acknowledged variability in banks’ willingness and ability to work with mezzanine debt, noting that experiences can differ based on the bank’s familiarity with subordinated debt structures. He highlighted that while standardized documents like intercreditor agreements exist, the negotiation process can still be influenced by the specific bank’s policies and past experiences.

Practical Advice and Solutions

The session provided actionable advice, emphasizing the importance of understanding financing structures and the need for businesses to consider a range of options when seeking capital. From exploring local banking relationships to tapping into the burgeoning private debt market, the dialogue underscored the nuanced landscape of alternative growth capital.

In addition to financial strategies, practical suggestions such as requesting deposits for projects were discussed as a way to mitigate cash flow challenges, especially prevalent in the construction industry. This approach reflects a broader trend towards more proactive cash flow management, crucial for businesses operating in sectors with pronounced seasonal fluctuations.

Industry Familiarity of Private Credit Providers: Bob’s Question

Bob’s inquiry centered on whether private credit providers typically possess deep familiarity with the borrower’s industry. This question opened a broader discussion on the expertise level required by lenders to effectively support businesses.

John Stanier of Clarity Capital Advisors first addressed the query, indicating that while some private credit providers may specialize in specific sectors, many are generalists who evaluate opportunities based on the overall business profile, including revenue, profitability, and growth potential. “Specialization can vary, but a detailed understanding of a business’s fundamentals is crucial,” Stanier observed.

Trotter supplemented this perspective by sharing Salem Investment Partners’ approach: “We invest in companies and industries we understand. If a business falls within the ‘old economy’—manufacturing, distribution, consumer products—we’re more likely to have the requisite familiarity.” Trotter underscored the value of leveraging past investment experiences to inform new opportunities, ensuring a pragmatic and informed lending approach.

Takeaways from the Discussion

The Q&A segment highlighted the dynamic between traditional banks and alternative financing options, revealing the intricacies of negotiating financial agreements like subordination or intercreditor agreements. It also shed light on the importance of industry familiarity for private credit providers, a factor that can significantly influence the lending relationship.

Participants gained practical insights into navigating the complex landscape of alternative growth capital, underscored by the panelists’ emphasis on the importance of partnership, flexibility, and mutual understanding between lenders and borrowers. This dialogue not only answered specific queries but also broadened the attendees’ perspectives on leveraging alternative capital to fuel business growth.

The detailed responses from the panelists underscored the nuanced considerations businesses must navigate when exploring alternative financing options. Whether addressing the compatibility of banks with mezzanine debt or the importance of industry familiarity for private credit providers, the discussion illuminated the multifaceted nature of securing and managing alternative growth capital.

Looking for more information? Contact the Team at Kaplan CFO Solutions.

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