Ben Edwards, Managing Partner at Syntaxis, outlines the reasons for the financing problems faced by European businesses, and looks at the alternatives.
While deal activity levels are picking-up across Europe, in Central and Eastern Europe, long-term debt and non-equity financing for strong businesses looking to grow is proving much harder to come by than in Western Europe.
This is the case for two key reasons:
- Existing senior banks required repayment profiles which do not necessarily provide the requisite flexibility for growth-related capex, and when it is available, it is very expensive.
- When there is term capital available, it is typically in the form of pure private equity, and those providing it typically need control to structure their investments to maximise returns.
However, mezzanine players, such as Syntaxis, are working to make up for this shortfall. Traditional mezzanine, combining cash interest, an element of contractual PIK interest, and equity upside, increasingly in the form of warrants, is the way to bridge the gap. Because of the way warranted upside can be structured, there is relatively little dilution to the entrepreneur.
In terms of the upside, and more specifically] the proportion of those prospective capital gains generated by the warrant relative to the interest-related flows, the entrepreneur gets a longer-term financing partner with interest totally aligned with theirs.
While sponsorless mezzanine investing entails greater risks for traditional mezzanine players, the rewards can be tremendous.
