Exploring hybrid capital opportunities for mid-market companies

Over the past decade, there has been a significant diversification of financing options for businesses as the venture capital and private equity ecosystems evolved. Other options including venture debt have also developed for companies too premature for traditional bank debt. Hybrid financing has emerged as a noteworthy strategy, proving beneficial for companies and investors alike. 

Hybrid financing refers to an investment strategy that combines elements of debt and equity to meet the capital needs of a company. This approach aims to capture the advantages of both debt and equity financing while mitigating some of the associated drawbacks.

This can take the form of mezzanine debt which sits between senior debt and equity in the capital structure, often offering more flexibility in terms and conditions. Lenders receive an ‘equity kicker’ which may provide the option to buy shares at a particular price at a future date or convert the debt to equity when certain business requirements are met.

Some investors offer both debt and equity solutions. This allows companies to tailor the proportion of debt and equity components according to their specific financial needs and risk tolerance. 

Hybrid capital presents a middle ground between the fixed obligations of debt and the ownership dilution associated with equity. This offers a unique set of advantages and tradeoffs that savvy investors and companies are leveraging to achieve mutually beneficial outcomes. 

Mid-market companies can engage the services of a seasoned advisor to navigate their hybrid capital options.