“Money is going to cost more” is a phrase we have been hearing since the beginning of this year.
Indeed, the rise in the key interest rates of our central bank, the ECB, is causing the cost of bank refinancing (the procedure by which banks can obtain money from the central bank) to be higher, and therefore higher borrowing rates for bank loans.
What is the consequence for entrepreneurs and project leaders?
Do they have other ways of coping with traditional financing?
“To begin with, let’s remind ourselves what so-called traditional financing or external financing is, obviously aimed at business owners or project holders.” – Dimitri Roux di Gambatto, Board member / International Advisor Licorne Gulf.
External financing, as its name indicates, is the fact of having access to a source of financing from outside the company. Nowadays and as for 2023 predictions, Private investors are increasingly looking at private markets as a chance to reduce volatility in their portfolio in times of rising inflation, geopolitical uncertainty, and rising interest rates causing volatility in public markets; and Licorne Gulf, a historical Capital Raising launched in Bahrain and Saudi Arabia by Alexandre Katrangi and Irina Duisimbekova, is a firm leading investors to question the traditional 60:40 portfolio model to turns their focus on the private markets virtues of disciplined underwriting, value creation, diversification, and downside protection, leading to increase demands for the asset class.
We can distinguish three main categories explains Mr Dimitri Roux di Gambatto, prime Board Member of the company following its 10 years of experiences in Europe, Asia and North Africa:
- Banks and bank loans form the first category, which is probably the most familiar to everyone; they require guarantees and are difficult to get past the commitment barrier.
- Investors, via the bond market, the second; difficult to understand for a neophyte, heavy and restrictive contracts.
- Then comes the third, the least known to company directors or project leaders, the financial markets; access to these is highly regulated and you must first carry out a stock market listing of your company.
External financing represents a solution and an interesting source of financing if the rates are low, if the company director or project leader can provide guarantees and if the company has an operation that requires deductible expenses.
In parallel, there is internal financing which suggests that it is only the company’s capacity to finance itself (the cash flow).
Although it is true that it is an integral part, cash flow is not the only internal financing lever.
Indeed, whether it is funds accumulated from retained earnings or current account contributions from partners, the most important source of internal financing comes from private equity.
“This is the act of selling part of one’s capital to a risk-taker (investor) in return for an amount based on a valuation and an integration of additional funds to provide for the subject or project” Mr Roux di Gambatto precised, “Launching a new product or service range, buying out a competitor or even internationalizing the company are examples of projects and It should be noted that it is possible to produce cash out for the entrepreneur or project owner at this time.” He added.
There are three main advantages in leverage funds through Private Equity:
- The first is its cost: in principle it costs nothing. The company therefore does not incur any costs due to private equity.
- The second, and not least, is that it increases the confidence and willingness of external financiers and thus opens the way to additional leverage. The key example being the obtaining of a bank loan facilitated by the solvency and the quality of the signature of the risk holder entering the capital.
- Finally, the third advantage lies in the fact that private equity ensures greater financial independence and therefore greater latitude in the strategic decisions of company directors or project leaders.
Fortunately, because PE is a relatively nimble, unencumbered asset class with investors that by definition have a much longer timeframe than public company executives, PE firms have the ability to look beyond the immediate crisis. They have the capability to respond by saying, “How do we come out of the crisis at the other end, whether that’s in three months or six months or two years’ time, as a stronger company, with the ability to retain employment, gain share, increase profitability and ultimately move towards a valuable exit on behalf of our investors?”; confirms Mr Roux Di Gambatto, – “Keeping that in mind, in terms of parallels with previous crises, there is more in common than there is distinctiveness in what we have just been through”
We have just seen the two main areas of financing; others exist of course but are at my margin in relation to the global financing market.
“To govern is to foresee,” said Emile de Girardin, to govern a company is to ensure that the projects decided upon can be carried out successfully.
To do this, financing is essential; it is the first stone in the building. This is why company directors or project leaders must think and apply a good strategy, or at least the most appropriate one, with regard to the axes and stages of financing. It is often the least complex methods and processes that prove to be the most efficient.
Opening up your capital to a risk-taker (private equity) allows you to negotiate better with your partners, suppliers, banks, etc.
And thus considerably increase its capacity to act.
Of course, at Licorne Gulf, we can accompany you, assist you and advise you on these issues, which are our daily business, both for us and for our risk-bearing partners.
Our expertise, our know-how and our relationships are at the service of our clients.
Dimitri Roux di Gambatto
Board member / Advisor Licorne Gulf.