How is debt typically used by financial sponsor and Private Equity backed companies?
When businesses need funding—whether for expansion, acquisitions, working capital, or equipment—they often turn to debt financing, which offers lower cost than equity and avoids ownership dilution. The most common debt instruments are:
Term Loans: lump-sum financing repaid over fixed terms, often secured by collateral or backed by the company’s credit at predictable rates
Lines of Credit: revolving facilities let companies draw and repay as needed, paying interest only on funds used, making them ideal for short-term cash flow needs or seasonal fluctuations.
Equipment Financing or Leasing: debt for specific assets—like machinery or vehicles—companies often use equipment financing or leasing, which preserves cash and gives lenders tangible collateral.
Commercial Real Estate Loans: support property acquisitions backed by the property itself.
Term Loans, Lines of Credit, and specific asset loans are often referred to as senior debt given they are the first capital in line for repayment. Larger or mature companies often layer in mezzanine or subordinated debt, which sits below senior debt in repayment priority. Although riskier—especially in bankruptcy—this debt usually carries higher interest rates. It’s frequently used in leveraged buyouts or acquisitions.
Private debt placements are where companies raise capital directly from institutional investors with fewer disclosure requirements and customized terms.
How do PE-backed companies raise debt?
When companies need to borrow private (non-government) money, they usually do it in one of two ways: through the broadly syndicated loan (BSL) market or through private, direct lenders.
In the broadly syndicated loan (BSL) market, a bank underwrites the loan and distributes it to institutional buyers through syndication. Liquidity is typically high. The process is deliberate, often slow, and pricing relies on appetite from leveraged buyers, including collateralized loan obligations (CLOs), loan funds, amongst others.
In the other system, direct lenders, most often credit funds backed by institutional capital, write the check themselves. These lenders keep the loans on their books and, as such, are often able to negotiate bespoke terms with borrowers.
Borrowers and sponsors must weigh these differences carefully. Flexibility, visibility, timeline, and counterparty behavior during distress all vary and present different risks to each party. The two markets coexist but don’t always converge.
Conclusion
In summary, companies can choose from a rich suite of debt tools—from predictable term loans and bonds to flexible credit lines, asset-backed financing, and hybrid instruments like venture debt and convertibles. The right mix depends on the firm’s stage, cash flow needs, credit profile, and risk tolerance. When used wisely, debt can accelerate growth while preserving equity—but too much leverage or weak protections can quickly backfire.
