Private Equity vs Bank

Ciboag96

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I've seen this back and forth for a while. PE backed companies vs companies working off bank loans.

What's the real upside to PE vs Bank Financed growth for a business? Connections?

fairviewcrew

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3:53p, 9/8/20

It's all a cost of capital equation....

Bank loans will historically be much cheaper source of financing, as PE funding has a heavy equity component (so they get a lot of the upside)

But most new companies can't get bank financing out of the gates (due to lack of assets).... thus they have to take PE Capital

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fka ftc

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In reply to fairviewcrew • 4:22p, 9/8/20

Fairview absolutely correct. Get bank financing as the terms will be much more agreeable. Only reason to go PE route is because you cannot get bank financing.

Only caveat I can think of is if you needed to show equity vs debt for some sort of financial statement purposes - for instance if bidding on contracts or needing to secure bonding / surety support.

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4:54p, 9/8/20

AG

It always depends on the needs of the business. Two reasons I've seen business that had access to PE or Bank financing take PE financing:

1. Team expertise - Some PE firms have a staff of ex-McKinsey / Bain / BCG ready to jump in as VPs / CSuite and next level the business. The people that got you from A to B might be highly competent crushers but lack the skills to go from B to C.

2. Liquidity event - Some founders want to both grow their business and cash out some of their sweat equity today to compensate for deferred purchases that were invested into the business (ie a house, shored of retirement savings, a 50-foot yacht) . Hard to cash out your equity with a bank loan.

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Cyp0111

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5:02p, 9/8/20

Depending on industry private credit (assume you're talking about PE debt side) do loan on a non-resource level and will advance at a higher rate with a structure that may be more scalable.

With that comes higher rates, more lender control and more aggressive lender action if you bust a covenant.

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