Cherrytree Group LLC Blog

Private Equity as a Banking Alternative ... by Warren Kirshenbaum

Banks are approaching lending practices with a stranglehold mentality.  Not only have underwriting practices tightened since the financial meltdown began in 2007, making it more difficult for businesses to secure financing for their operations and acquisitions, but banks are inserting and enforcing loan covenants that are causing business owners to reevaluate their use of bank financing.  

Recently, potential clients have requested meetings to discuss the possibility of raising private equity in order to pay off existing bank credit facilities, and for use as working capital and for acquisitions.  The necessity to extract one’s banker from becoming an unwitting business partner is an inbred business owner mentality.  Because bank credit facilities sometimes contain loan covenants that require a company to maintain certain pre-determined profit levels, limit a company from accepting new business from a large client, require the maintenance of a high level of raw materials or inventory, and discourage new equipment financing, the successful operation, growth and sustainability of an enterprise is being choked by the banks' credit facilities, rather than such capital acting as a growth engine for business.  It is a paradox for institutions that have existed in principle to provide capital to facilitate entrepreneurial growth and development to be having a restrictive effect on business, but that is the way it has become in today’s economy.  Banks are forcing business owners to convince its banker to fund routine business activities, such as those that result in an increase in business because the banker is concerned that the increased business is coming from one large customer rather than several smaller customers.  Such a discussion is heresy for a business owner --- these are business decisions, not banking decisions!  Moreover, securing financing for acquisitions has also become difficult, and with the economy as it currently is, expansion by companies is more likely through acquisition than it is through job creation.  

Accordingly, private equity is becoming more attractive as a source of funding for many businesses.

Structuring and completing a private equity offering is a complicated, but worthwhile endeavor.  Private offerings are exempt from Federal and State securities laws so long as the issuer (i.e. the company raising the funding) complies with the statutory exemptions of Regulation D of the 1933 Securities Act, and its State counterparts.  Some characteristics of Reg. D offerings are that they are limited in size and investor type; must identify accredited vs. non-accredited investors, and can only include a maximum of 35 non-accredited investors; must fully disclose all salient terms of the offering as well as applicable disclaimer language for forward-looking statements; and cannot use general advertising and solicitation.

The Cherrytree Group and Kirshenbaum Law Offices have extensive experience in advising clients on structuring and completing private equity offerings.   We can assist with many different types of private equity transactions, including mergers and acquisitions, financing and formation of funds, as well as tax and employee benefits. The Cherrytree Group, LLC can provide creative solutions to the most complex issues in evaluating, structuring, negotiating, and consummating private equity transactions.

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