Private Equity Debt question

July 07, 2021

by a searcher from Columbia University - Columbia Business School in Jacksonville, FL, USA

Okay, I may be showing my naivete on this question, but how does a PE firm obtain non-recourse debt? Let's say I spin out of a larger fund and have no Billion dollar family office behind me and no capital partners that have a net worth to backstop a $30M Enterprise Value investment. I am aware of debt funds, but most of the ones I have worked with are usually a combination of mezzanine debt and equity. Thus, how is non-recourse debt obtained in a transaction of this size (or smaller or larger)?

Thanks in advance.

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Reply by a searcher
from The University of Texas at Austin in Dallas, TX, USA

Non -recourse to the individual, the company and legal entities will have recourse. All SBA loans will be recourse to the individual. There are 4994 commercial banks in the US, there are over 750 with over a $1bn in assets. We just did a re-finance of $5mm of equipment and $3mm RLOC and had conversations with over 10 lenders to find one that liked the deal under the terms we were seeking. Once you have a lender's package prepared it is not hard to share the details with several middle market lenders. We where upfront about not having recourse to the GP/LPs and only company and assets. The rates and fees will be higher, but in our experience not that much maybe 50-75bps on rate.

Reply by a lender
from Clemson University in Reston, VA, USA

Is it a company that rolls up into a holding company currently? When you spin off, what will the ownership look like? Will there be equity in the company? If yes to any of these sounds like a recapitalization and yes it’s possible through a bank or PE, no recourse is possible but depends on the strength of the company. Meaning the cash flow is high and the leverage is lower than 4x. Or if above 4x, then step down covenants and PG covenants can be put into place. redacted

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