Organisations often face funding shortages to continue their operations. They could look to investors when they need to raise capital, but may not always find angel or retail investors, especially of they have considerable debt. Investment and corporate banks can arrange loans for companies burdened with debt. Demand for leveraged finance investment banking will likely increase in the coming years. We list further on the benefits of leveraged loans for private funds in the middle market.
Understanding the concept of leveraged loans
Leveraged loans are loans extended to individuals and companies with poor credit histories and burdened with debt. Like other loans, leveraged loans are also offered by corporate and investment banks.
While leveraged loans have many benefits, investment banks also have to bear the risk of default. Since leveraged loans carry higher risk of default, they have higher interest rates.
Understanding private funds in the market
Private funds benefit the most from leveraged finance investment banking. These funds do not rely on retail investors or the public for raising funds. In line with investment regulations, private funds are an exception and rely on private equity funds and hedge funds to raise capital.
Benefits of leveraged loans for private funds in the middle market
Middle-market companies are classified based on their revenue, number of employees, size and a few other factors. Middle-market companies account for a large part of the sector, and the revenue they generate varies from one country to another. Companies with revenue of USD5-500m are classified as middle-market companies. Leveraged finance investment banking helps private funds in the middle market in the following ways:
- Financial leverage can multiply the revenue of a private investment company. Private funds can earn more interest and cover the principal amount within a short period of time. Other types of loans arranged by investment/corporate banks do not carry such high rates of interest.
- Many companies require loans for short periods, even if they entail high interest rates. Most loan providers offer capital to corporates for long periods. With leveraged loans, private funds can increase their market share and help those companies that need capital only for short periods.
- Companies are resort to mergers and acquisitions (M&A) both to expand and survive. Leveraged loans are considered to be the best loans for M&A deals. By offering leveraged loans, private funds target companies wanting to engage in M&A, and generate more profit.
- Private funds can also apply rolling/floating interest rates for leveraged loans.