Growth capital options expand beyond traditional bank lending – Crain’s Detroit Business

Two of the more successful of these, also known as business development corporations, are Chicago-based Monroe Capital Corp. (Nasdaq: MRCC), which was founded in 2004, and New York-based Golub Capital BDC Inc. (Nasdaq: GBDC).

Sowerby said that investing in those secured assets has become a way for institutional investors to swap out their bond holdings for higher yields. Instead of getting two and a half or three percent from bonds, he said pension funds can get high single- to low-double digit returns.

“If you’re a pension fund trying to meet actuarial returns, it’s hard to do that with bonds,” he said. “They lose liquidity and they take on a higher lever of risk, but they make a better return.”

Cliff Roesler, a managing partner at the Birmingham-based investment banking firm of Angle Advisors LLC, said there has been such a profusion of new funding options that his firm is adding a new managing director soon to focus on those sources of money for clients wanting to find growth capital. “The new director’s specific responsibility will be growth capital from new and innovative funding options,” he said.

He said those options fill in nicely for traditional sources of bank funding that got scarcer or dried up during and after the Great Recession.

“Banks are hyperegulated, now,” he said.

One of the options that has grown more popular with direct lenders and with business owners looking to shorten the time and simplify the process of raising a large funding round is a kind of credit facility known as unitranche financing.

In the past, a business owner might have had to negotiate a handful of agreements with a variety of lenders. He or she might have sold off a chunk of the company in an equity deal; got a traditional loan from a bank, using collateral for a lower rate of interest on what is called senior debt; used other assets at a higher rate for a second-lien loan, which is paid off in the event of trouble after senior debt; negotiated a chunk of unsecured debt known as mezzanine funding, paying a much higher interest rate than for the senior debt; and perhaps found a lender willing to loan against enterprise value or cash flow.

Finding lenders for each of those chunks was time consuming, complicated and came with high legal fees.

In unitranche rounds — as in the deal for HopCat — some equity is exchanged. The other lines of debt are rolled into a combination of senior and subordinated debt at a blended rate that is higher than typical senior debt and lower than mezzanine debt.

The equity can be in common stock or in preferred stock, which is repaid before common.

If a senior bank loan is at 5 or 6 percent interest and mezzanine debt at 14 or 15, a unitranche round might be at 11.

While banks have been prohibited in investing in private equity companies or venture capital, they have broadened their commercial lending away from traditional senior debt.

Huntington Bank, for example, has gotten aggressive in mezzanine lending, typically lending between $2 million and $7 million for a five-year loan.

“We’ve had to find ways to be more creative,” said Brian Marshall, who heads Huntington’s commercial lending in Michigan and northwest Ohio. “Last year, for example, Huntington hired an equity adviser to help customers raise money. Banks are approaching the market in new and unique ways.”

He said Huntington can take both a senior-debt chunk and a mezzanine chunk on deals if needed. “And we can introduce customers to equity partners for the rest,” he said.

In 2016, Huntington negotiated a unitranche round for Jim Whitehead when his Rochester Hills-based company i.M. Branded was spun out from the Penske Automotive Group. The company makes graphics, displays and furniture for automotive dealers around the country, including the huge, 18,000-square-foot banners that adorn the Chrysler World Headquarters and Technology Center in Auburn Hills.

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