Private Credit: The Game-Changer in Capital Funding for Middle Market Companies

Speaker 1 (00:00:02) - All right, guys, we got seven minutes on the clock. We're going to talk about deals. We're going to talk about the world of investment banking M&A and learn about private credit Matt welcome to the show.

Speaker 2 (00:00:14) - Thanks for having me, brother.

Speaker 1 (00:00:15) - Yeah, man. All right. So talk to us. In the world of investment banking, mergers, acquisition, what the heck is private credit I have no clue.

Speaker 2 (00:00:22) - Yeah, great. Great question. We get asked that question a lot. And it's a cool thing to talk about because it's new, which means not everybody knows about it, which means that it's worth talking about. Right? Maybe it can help some people. So private credit is a is a term for an ecosystem of capital that is not from the bank. So it's a it's a term for non-bank capital solutions that are used to fund a bunch of things that I think traditionally, like in Middle America, you know, Main Street America companies have been funded mostly just by straight equity, right? Whether it's private equity or PBM work.

Speaker 2 (00:00:57) - Right, Dennis. Doctor money. and really, what it is, is really cool is it's the efficiency that is always existed or is it has existed for a long, long time up market with large public companies and large private equity owned companies coming down market to what I would call, you know, lower and middle market companies, Main Street, American companies, to do, to provide capital for all the things that banks generally hate at 4 or 5% money that you traditionally had a choice, like, okay, I'm going to go to my banker, right? If I own a company, right, or I manage a company, I'm going to go to my banker. They're going to say, you're going to say, I want this, and they're going to say yes or no. That's like 4 to 7% money. And if they say no, you either don't do it or you go get, you know, massively dilutive, 30% cost of capital, straight equity and not in the in between. Right.

Speaker 2 (00:01:48) - Whereas large companies have, you know, a bank deal. They've got a second lien deal. They've got high yield, they've got converts and they've got the public markets. It's the efficiency of capital coming down market to Main Street American companies. And it's really cool because what it, what it spits out at the bottom, if you utilize this capital in the right scenarios are sometimes paradigm shifting opportunities for private companies. So acquisition finance right. Or I run a software company I don't have actually have any collateral. So the banker doesn't like me. But boy I really don't want to, you know, give away all the equity in my company. distressed financing. we're now seeing it used by private companies, to roll up companies like private equity firms have. But without the private equity company, and keeping the equity returns and markets. So it's this pocket of non dilutive capital that will allow for all the things that banks don't generally want to do. The traditionally had to do with equity at a really high cost of capital and with a lot of governance, on a more efficient basis.

Speaker 2 (00:02:49) - So it's the pocket of capital between kind of 7% cost of capital, probably where banks start right now at 25 or 30% cost of capital, where private equity firms really want to invest at it.

Speaker 1 (00:03:02) - So let's just say I'm looking to do a rollup, right? Or maybe in the situation of a distressed group, right. Last couple of years been pretty tough. Right. And and I'm looking at this and I'm going, man, dilutive. I just I met with a construction company this morning. He goes, we got all these projects coming up, but we don't have, you know, like, what do we go sell shares. What. So how does this actually work. Yeah.

Speaker 2 (00:03:25) - So the way it works and this is meant to be a plot, but it's just how all of our conversations start, right? So if you're an investment banker and somebody is going to sell a company, they interview, interview 3 or 4 investment banks. It's a beauty pageant. They pick somebody. These conversations all start with a business owner or management team saying, I've got these wants, needs or problems.

Speaker 2 (00:03:44) - And then we start with an options analysis. Okay, here are all the ways to fund that. What is and what isn't possible in the various pockets of capital, which is really cool, right? So it's a solutions based approach. And all we're really doing is pairing really deep private capital market, relationships with those wants and needs and problems of a private company. and it can it can look like a lot of things. It can be unit debt, which is basically like super size term loan, right. It can be structured credit, which is and by the way, unit tranche is probably like 10 to 12% cost of capital in today's market looks a lot like a traditional bank deal, except oh pretty cool. You don't have to have a personal guarantee. And instead of five year amortization and really heavy principal payments, you're doing 100 year a m, all the way to structured structured credit, structured equity debt, which are highly bespoke capital structures, that are, you know, very flexible and maybe like 15 to 20% cost of capital.

Speaker 2 (00:04:41) - So it's really, really bespoke financing solutions to pair with the wants and needs. private companies got it.

Speaker 1 (00:04:48) - So that's on the, the company side receiving. Right. So you you create some here's the solutions. Here's some options. Right. On the flip side, there's someone who's going to be supplying that equity or, or the, the capital. So.

Speaker 2 (00:05:01) - You're going to use that word, aren't you? Oh, of.

Speaker 1 (00:05:03) - Course. And I'm totally going to use the there's PM private placements and then there's DPM dentist doctor money. So d dm pm I like that I'm going to use that all the time. So but you know on the, on the, on the doctor dentist side, the person writing the check or maybe coming to you saying I am looking for capital, for opportunities like what? What does that look like?

Speaker 2 (00:05:24) - Yeah. It's it's generally somebody that says the, you know, the on the, on the company side at some, you know, they have a, they have a capital need or want or a desire and the bank has said no.

Speaker 2 (00:05:33) - And, or they've been approached by a private equity firm to underwrite them. And they're saying, should I do it right? Or, you know, is there somebody else to do the deal that the bank told me that they wouldn't do? That's how it usually starts. And then these deals are funded by think of private equity funds, except they've got a different mandate. They invest in a little bit more secured basis, but still very much the same thing. And they want to put money to work. and in fact they actually usually want to put more money to work, not give me my money back. And but in a very similar fashion. So mostly funds family offices also do this direct lending. Right. So, you know, Michael Dell's family office, for example, has a private debt, you know, private credit arm, to put capital to work in this manner. but all private money, all that's called all that's not, you know, borrowed on sofr is called money from, you know, the same capital base basically.

Speaker 2 (00:06:25) - Yeah.

Speaker 1 (00:06:26) - So, Matt, I got another question. What is private credit? No, I'm just kidding. You did an absolute phenomenal job at explaining this opportunity for both companies and and people who want to, you know, deploy some capital, get get money working for them. Matt, where can people go to find out more about you and maybe get that solution, that, that you guys provide?

Speaker 2 (00:06:48) - Yeah. Thanks for asking. Bridgepoint IB as an investment banking. Com is the place to go. There's a bunch of resources on there to for private companies. and, we'd love to talk to anybody that's interested in the product.

Speaker 1 (00:07:00) - Cool, guys, we did that all in seven minutes or less. As always, reach out to our guests and say thanks for being on the show and if they could help you with what you're working on, their contact information will be in the show notes below. If you have a deal that you'd like to talk about, head on over to the deal scout.com, fill out a quick form, maybe get you on the show next.

Speaker 1 (00:07:18) - Till then, we'll talk to you all on the next episode. Love you. Bye bye.