Reso Invest brings you all the latest news on the loan market, the equity markets and the insurance markets as well as focussing on investments and capital funding.
Topics which we cover include mezzanine finance, securitization and short term finance, to mention just three areas.
Mezzanine Finance
Mezzanine finance is a form of debt which is usually used in leveraged buy outs. It is a hybrid of debt and equity, being debt capital which carries the right to convert to equity or ownership in the event the loan is not paid back in full to the agreed timetable. The returns expected from mezzanine capital are higher than conventional debt as it is generally subordinated to the senior debt of banks. As such mezzanine carries a high level of risk should a company co into insolvency or liquidation.
Securitization
Securitization is the process of bundling smaller financial assets into a larger package, with tranches of the larger package then resold to institutional investors. Securitization has become very popular in recent years as it allows companies to receive funding which previously would have been unavailable. It also brings liquidity for investors allowing them to buy and sell previously untradeable assets.
Short term finance
As the name suggests, short term finance provides funds for very small period of time usually through short term loans. These loans are typically unsecured which means that higher returns need to be paid to offset the increased risk for the lender.
Investment cases are usually well planned out and executed, with considerable time left between the loan application and the time when the cash is needed. Sometimes however unexpected events overtake us with the result that cash is needed quickly, whether for short term working capital, an unexpected opportunity or to replace capital which has unexpectedly broken down.
While private equity companies are primarily concerned with venture capital investment, they have been known to make short term loans available if they believe the business case presented is strong enough. The criteria for these loans is no different from any other types of loan financing. They look for an ability to repay the loan within the period under question and they would also look for appropriate security if it is available. Being private equity firms, their definition of security is more flexible than many banks and we will consider alternatives such as earnings securitization. Under this arrangement the ability to repay the loan is more important to us than the level of assets the business has to guarantee the loans.
Private equity houses appreciate that if you are applying for quick funding, then you need a quick answer. For that reason, applications for short term loans are usually reviewed within 72 hours and the money can be available within an hour of a loan decision being made. Because VC firms deals with a number of different lenders they have ready access to a pool of finance which they can drawdown. The cost of the financing will vary depending on the reason for the loan and the level of security available. As with all private equity lenders, a return which is commensurate with the level of risk they are expected to bear is expected.
Should rollover finance or the transition of the short term loan into a secured long term loan be required, further business cases would be required. Venture capitalists reserve the right in these circumstances to consider providing funding by way of mezzanine finance or straight equity.