Current capital market climate creates favorable opportunities for entrepreneurs

Bill Boyar, Philip A. Dunlap

November 10, 2017

The financial pessimism from more than 24 months of low oil prices, and a tumultuous political year, has many business owners wondering whether fair-priced capital is available for them and if so, where should they look? After hunkering down through the storm, entrepreneurs are asking “can I come out now?” The answer is a resounding “yes,” but the choice of which capital to pursue can depend on your goals and industry. Not all capital will work equally well for all businesses.

Private Equity

After several years of lower than normal private equity activity, 2016 and 2017 have seen an uptick in private equity investments, particularly in the North American energy sector. Many private equity investors have become comfortable that they can be profitable with energy investments when oil is priced at or near $55/barrel. Additionally, as business owners have become more confident in the overall economy, valuations have increased, which means now may be a good time to seek private equity investment or an exit.

For a business owner who needs a capital infusion for his business and has the ability to wait for a longer term liquidation event, obtaining growth capital from a private equity investor is a great option. By partnering with a private equity investor, the business owner can focus on growing his business with the additional capital necessary to achieve a sizeable return upon a sale of the business.

Alternatively, for a business owner looking to recapitalize in order to take some money off the table while still retaining an ownership in his company, private equity investors are an attractive option now and in the near future. This model is especially appealing for a business owner who feels now is the time to increase liquidity but wants to remain engaged in the business in order to maximize its potential and make a significant profit upon an exit in four to six years.

With valuations high and private equity buyers ready to deploy capital, growth capital and recapitalizations are both available for business owners to pursue. Additionally, because of an abundance of “dry powder” sitting with private equity firms, deals can become competitive, which ultimately benefits the seller/business owner.

Banks and Other Lenders

Despite the regulations that have hindered banks for the majority of the last decade, traditional banks can be a great source of funding for businesses, particularly those engaged in business-to-business transactions and those with steady recurring revenue. With interest rates remaining low, traditional bank financing is an excellent option for a business owner if his or her business fits the preferred industries/business models of traditional banks. Industries that banks are less inclined to lend to include oilfield services, offshore oil and gas exploration and offshore services.

However, if the business would have difficulty obtaining favorable terms from a traditional bank, the growth of non-bank or alternative lenders has served to create another source of capital for businesses. While the terms may not be as attractive as a traditional bank will provide, and they may present extra risk on the business owner in the form of debt that can be converted into equity, non-bank lenders are known for their ability to get deals financed and provide business owners with the capital needed to grow their business.

Conclusion

No matter the state or type of your business, thanks to the business confidence of private equity, banks and non-bank lenders, capital is readily available. The only question is which provider and structure are best for you.