Evolution of the financing of equity operations

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Decree n°2016-1587 of 24 November 2016, within the framework of the Sapin II Law, now authorises certain investment funds to lend directly to companies, once again attacking the banking monopoly. This new decree, in line with the current trend towards disintermediation of financing in the European Union, will inevitably lead to a change in the financing of equity operations and companies.

It thus enables non-bank actors to contribute to the financing of the economy and more particularly companies that cannot benefit from traditional bank loans.

This additional service offer will in particular enable debt funds to intervene more actively in equity transactions and lead to a restructuring of the debt market.

Financing of external growth:

 financing of equity operations

In order to finance its external growth and development, a company needs capital that often exceeds its cash flow. For this reason, it uses external capital, such as bank financing, to carry out this type of operation.

However, if the bank refuses to finance the transaction, a fund that already holds stakes in the company’s capital may be interested in providing the necessary debt financing. Indeed, already present in the capital, it is in the best position to judge the solidity of the company’s business model and its ability to repay the debt.

In addition, unlike a bank that seeks a balance between its commitments and the amount of its deposits, an investment fund seeks to make its investment profitable. Thus, it will be able to accept a higher debt leverage, in order to optimize its investment.

Debt funds can now intervene when the traditional banking system no longer meets the financing needs of the equity operation and companies for their development.

An additional player in the LBO market:
A leveraged buyout is a transaction to buy back a target company, partly financed in equity by the acquiring investment fund and with one or more additional tranches of debt.

The possibility for debt funds to lend directly to companies, as part of LBOs, increases competition in an already highly competitive market between banks and other mezzanine funds. In doing so, this competition should lead to a battle over interest rates.

Indeed, the latter is determined by the lending institution, depending on the risk of the transaction. It will tend to increase with the risk of default by the borrower. All the more so when this risk is not initially assumed by a traditional credit institution. Currently, debt fund rates (5%-7%) are higher than bank rates (1%-3%). This is still reassuring about the future of the traditional banking system.

However, debt fund rates are significantly lower than the interest rates applied by mezzanine funds (10%-12%). Thus, the arrival of these new entrants on direct loans to businesses should lead to a reduction in interest rates for the latter.

As companies can benefit from a wider choice of financing solutions for the equity operation, they can only welcome this measure. It allows them to continue to benefit from traditional bank loans, but also to benefit from the new expertise offered by debt funds.

Source :



Alexandre NTUMBA

Alexandre NTUMBA

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