Private Credit Might Be Your Perfect Funding Solution
Keystone National Group (Keystone) is an investment manager primarily focused on direct private credit investments. Founded in 2006, this private lending group invests in various types of credit instruments such as loans, receivables, and leases. And they want to educate other organizations on the value of private credit.
Grant Calder is the vice president and Head of Business Development at Keystone Nation Group in Salt Lake City. He says that there are huge differences between what he calls “hard money” and non-bank lenders like Keystone. “If you are a regular reader of the Wall Street Journal or Bloomberg,” shares Calder “you’ve probably heard of private credit. If not, I suspect private credit isn’t a familiar term.”
Calder says that while private equity firms, like the powerhouse Blackstone Group, has had a tremendous amount of press in recent years, private credit has generally not had similar coverage, especially from mainstream press outlets. “To put it in baseball terms,” says Calder “hitting home runs generates publicity, like you see in venture capital and private equity, but less attention is given to just hitting singles and doubles over and over again, like in private credit.”
Private credit was designed to help the middle-market
Following the recession in 2009, many banks increased their private lending requirements, leaving many middle market businesses struggling to obtain financing, leaving businesses to sell their equity or even their ownership in order to obtain the financing necessary to operate. Enter private credit.
“Private credit really has emerged as its own asset class over the last decade as a solution for these middle-market companies.” Calder goes on to explain that private credit investors tend to not earn the same high rates of return that private equity or venture capital firms generate. Meaning, as interests rates remain low, more and more investors are looking for current cash flow, creating high demand for private credit instruments.
Private equity investors focus on taking an ownership stake in the companies or asset they are targeting. These investors will make an investment in the equity of a private company, meaning they own a portion of the company, with the intent to use its investment to improve that company’s technology, marketing, distribution, or operations to create value. The company will then be sold either to another investor or company through a merger or acquisition or sold to the public through an initial public offering.
However, private credit investors are different in that they do not take an ownership interest in the company, but rather make investments in the form of a loan, receivable, lease or other credit instrument that are secured by the assets of the company. Private credit investors are typically senior in priority to private equity investors.
Discover if your company is part of that middle-market
Calder says that businesses in real estate, machinery, equipment, receivables, or other contract rights are part of the market private credit was established for. “Private credit investments can be a good fit for companies that may not check all of the underwriting boxes of a traditional commercial bank but do have assets that generate cash flow.”
In addition, many business owners may need financing, but would prefer not to sell any equity, or ownership, in exchange for that investment and others may also need to move faster than a commercial bank is willing to review their financing. Private credit investors can be an alternative source of capital to growing companies with assets and cash flow who are in need of financing to refinance an existing, higher rate loan, or even to take capital out of a company. They can generally review and approve a transaction quicker than a commercial bank and provide more transparency during the review process.
“If a real estate developer needs to close on the purchase [of property],” says Calder “but a commercial bank requires more than 30 days to review, a private credit investment may be a good solution for that developer.” Private credit investors have the flexibility to structure an investment that fits the needs of both the company as well as the investor, creating a win/win scenario.
As any business goes, there is no one-size-fits-all solution when it comes to financing. Whether you are in need of a private equity firm or a private credit investor, it’s important to educate yourself on what is right for the future of your business.