Borrowing costs are a chief obstacle for the mid-market businesses that underpin the world economy, constraining their ability to finance expansion at a time when governments are seeking economic growth.
Research conducted by Moore Global found that 35% of business leaders surveyed saw higher interest rates as a key challenge in accessing finance over the past 12 months. High borrowing costs and tighter financial conditions have affected business activity, prompting companies to raise prices, rely more on internal funds, and reduce investment and hiring plans.
The awkward middle
Mid-sized companies are often squeezed by the structure of the market. They may struggle to meet traditional bank lending criteria, while being too small to access public bond markets on favourable terms.
Unlike smaller businesses, they may also have limited access to specialist lending schemes. As a result, many are exploring private capital markets and alternative sources of funding.
Private equity ownership and the debt financing that can accompany it can help accelerate growth. Private capital providers can also offer combinations of debt and equity that traditional banks may not be able to provide.
Private capital steps in
Private capital is evolving from a focus on acquisitions towards a broader role in solving financing challenges for robust but cash-constrained companies.
Private equity has traditionally involved acquiring businesses, combining equity with debt and creating value through growth towards an eventual exit. That model remains important, but the current financing environment highlights the flexibility of private capital.
“Private capital is becoming more about the problem being solved,” says Candice Czeremuszkin, Moore’s global leader in private equity. “Higher financing costs mean that leverage has a more direct impact on the cash available to a business and therefore on the resilience of the overall investment case.
“That makes questions around revenue growth, margins, cash generation, operational performance and the ability of management to execute increasingly important. Private capital can provide another route when traditional financing does not perfectly fit the requirement.”
Private capital does not necessarily have to replace bank financing. Bank debt may remain appropriate for businesses with predictable cash flows and strong balance sheets. Equity may be better suited to businesses investing for growth without wanting to take on additional debt. Other forms of private capital can potentially sit between these two.
Financing strategies are therefore less about finding a single source of money and more about understanding the capital structure that best supports business objectives.
Where now?
Moore Global’s research expects restrictive monetary policy to remain a key challenge. Even when central banks ease policy, traditional lenders may reprice slowly and credit standards may remain tight, delaying the benefits for mid-sized borrowers.
Mid-sized companies are significant employers and a source of investment and productivity growth. If they cannot access affordable capital, the effects may include weaker hiring and lower capital expenditure.
Borrowing is expensive, but delaying investment also carries a cost. Private capital may help businesses secure the right funding structure and keep growth on track.
This article is an abridged version of the original Moore Global publication.
Read the full article on the Moore Global website: https://www.moore-global.com/intelligence/private-capital-to-beat-high-borrowing-costs/
Moore Intelligence provides up-to-date insights from leaders addressing the key challenges of modern business. To learn more, visit Moore Intelligence.
