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Leveraged Finance: A Vital Component of Private Equity

When it comes to private equity firms and credit providers, there's a saying that holds true: you can't live with them, and you can't live without them. Debt has become instrumental in generating the returns we've grown accustomed to. However, it's worth acknowledging that without the burden of debt, private equity professionals might experience a significant reduction in stress and potentially gain an extra decade of life!

Undoubtedly, securing leveraged loans greatly enhances the likelihood of a successful deal, as debt enables us to achieve higher returns when everything goes according to plan. Yet, the value of credit approval extends beyond funding the initial transaction:

Firstly, obtaining credit approval somewhat validates our analysis and optimism regarding the deal. While we strive to maintain objectivity, receiving confirmation from an independent team is reassuring.

Secondly, if a bank is willing to provide financing, it suggests that future buyers of the investment in 3-7 years will likely secure credit as well. Although numerous variables come into play, it provides a level of comfort regarding a smoother exit or divestment.

Lastly, receiving approval for private equity financing at this stage instills confidence in the potential for a future recapitalization. You may be familiar with my views on recaps from previous posts (feel free to search for them if interested), but regardless, it remains an exit option that requires consideration. Knowing that obtaining debt at 3 or 4 times EBITDA is feasible offers assurance when it comes to potentially recapitalizing the investment if all goes well.

While it's undoubtedly a love-hate relationship, the need for more love than hate is implicitly clear. As the focus of this post lies in the hidden value derived from receiving the approval of leveraged finance teams at banks. The underlying message here is that if you can't secure credit approval, perhaps the deal isn't the right one to pursue. Nowadays, financing options from private credit players are widely available, even beyond traditional banks. However, it may be wise to reconsider engaging in deals that border on uncertainty with banks. Additionally, as previously discussed, disapproval of private equity financing carries significant implications for divestment. Do you truly want to enter deals that may prove challenging to exit? The exit crystallizes the value you've created, directly impacting your return and serving as the Grand Slam of the investment process.

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