4 minute read 3 Nov 2020
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How rethinking capital could help private businesses to grow

By Randall Tavierne

Global EY Private Assurance Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.

4 minute read 3 Nov 2020

With less access to funding, private boards may want to consider direct capital alternatives to help build long-term growth.

In brief
  • Many common sources of capital such as credit lines and short-term loans are not readily available to private businesses.
  • To help stabilize and build long-term growth, private business boards may want to consider direct capital alternatives.
  • To attract funding, businesses should review their existing business structure, financial mechanisms and planning/implementation processes.

The eruption of COVID-19 has left devastating economic consequences in its wake. To stabilize and build long-term growth during these challenging times, private businesses need capital more than ever. Unfortunately, access to funding is not as easy as it was pre-pandemic.

Many of the common sources of capital, such as credit lines and short-term loans, are either currently unavailable or come with less attractive terms as lenders and investors are facing their own financial challenges and unknowns. Additionally, some investors may be looking to inject monies into distressed businesses for a quick return rather than considering a long-term growth investment. To acquire the funds necessary to push forward and grow stronger private boards need to look beyond traditional modes of funding and consider direct capital alternatives that align with their purpose and patience.

Here are five key advantages of securing direct capital:

  • Strategic fit related to value
  • Lower cost of capital than institutional funds
  • Less regulatory burdens than raising capital through public markets
  • Larger amounts of available capital
  • The entrepreneurial mindset, experience and insight of investors

Before seeking such alternative sources, however, private boards would be wise to assess if they are actually "direct capital ready." To do so, Steve Shultz, Global EY Private Tax Leader recommends they review the company's existing business structure, financial mechanisms, and planning/implementation processes. 

"What distinguishes direct capital providers is they are generally investing their own capital rather than raising and redeploying capital from other investors,” Shultz says. “Many direct capital providers will consider strategic, patient capital investments in other businesses.” 

He explains, "Often the direct capital is controlled by family offices, family strategic investors, business-owning families or a syndicate of strategic investors ready to invest in other businesses. These investors have the ability and desire to provide capital with a long-term horizon and a broad concept of value that can be very appealing for private businesses and purposeful owners."

To determine if your business is in a position to consider a direct capital investor, read Steve’s article What new capital options are on the rise as markets change.

Summary

Due to the COVID-19 crisis, private businesses will likely need capital more than ever. However, access to funding is becoming more complicated. Private boards may want to consider direct capital alternatives that align with their purpose, but first they should assess whether they are "direct capital ready."

About this article

By Randall Tavierne

Global EY Private Assurance Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.