NOERR

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MIHAI MACELARU


NOERR FINANCE & TAX

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IULIAN SORESCU

  |  08.09.2015

Alternative tools for financing business growth

Romanian market players need to enable the growth of their businesses to a next level by exploring more alternative financing tools.

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NOERR

MIHAI MACELARU

MIHAI MACELARU

ASSOCIATED PARTNER, HEAD OF M&A PRACTICE at NOERR

NOERR FINANCE & TAX

IULIAN SORESCU

IULIAN SORESCU

ASSOCIATED PARTNER, HEAD OF FINANCIAL DEPARTMENT at NOERR FINANCE & TAX

While interacting with various Romanian businesses either as lawyers or as financial advisors (common examples being while performing a due diligence investigation or when structuring a M&A transaction or a business restructuring/turnaround) we have often had the chance to see what tools the Romanian companies are generally relying on for financing their business.


Traditionally, Romanians are using shareholder loans or bank credits (which have become more and more sophisticated in the last years) for financing the development of their businesses, when the funds generated by their own activity prove to be insufficient. On an exceptional basis and more recently at a relatively larger scale, one can see various companies whose growth has been financed by using EU funds.


Although the economic crisis, which is pleasantly regarded by more and more reliable persons as already passed, showed the limits of the traditional ways, the Romanian market still seems to be, for various reasons, rather closed to alternative financing tools. When the banks ceased to lend money and the shareholders (for the lucky businesses which had wealthy shareholders with enough money to support their growth) decided to use their funds in order to ensure the stability of their own affairs, most of the Romanian businesses stopped their growth or went into insolvency/ bankruptcy, even when the business perspective was obviously already there.


We won’t elaborate here on all the reasons which, in our opinion, determined the current state of facts. However, we find these clear signs of a still non-mature market.


Since our experience also revealed a certain lack of adequate knowledge on the alternative financing tools, we briefly outline hereafter certain information regarding several of the most common alternative financing tools.

 

There are three main categories of alternative financing tools:

  • capital markets (attracting public funds/ investments in the business),
  • private funds/private investors (they can be either private equity funds, angel investors or mezzanine lenders), and
  • non-reimbursable funds (state aid and EU funds).

Capital markets

The capital markets term as such is very familiar to any Romanian which has the smallest connection with the business environment. Still, the figures show that  this is regarded just on a very exceptional basis as a solution for financing one’s business in Romania.


This might be either due to

  • the relatively complicated listing mechanism, involving a lot of criteria to be matched by one company in order to be listed on the Bucharest Stock Exchange Market (Bursa de Valori Bucuresti) combined with a lack of information thereof or to
  • the reduced market liquidity which led to certain failures in the past.

The Bucharest Stock Exchange devoted a lot of efforts in the last years to improve the above from all perspectives, the opening of the AERO Market being just one of the good examples in this regard, and we hope to see a very positive outcome of these efforts on a short to medium term.


In addition, the solid Romanian companies should be aware that they have the possibility to be listed not only on the Bucharest Stock Exchange Market, but also on the London, Warsaw, Prague and, why not, New York, Singapore or Hong Kong markets.


Private funds/ Private investors
Romanian entrepreneurs have a general tendency of not even considering the Romanian entrepreneurs have a general tendency of not even considering the possibility to ever sell their businesses. It is a pattern to see the sons and/ or daughters of the entrepreneurs involved in the business from an early age or, when the heirs are not around or willing to take over the business, businesses really disappearing when the one man show entrepreneur gives up. 

 

However, attracting a private investor in your company does not necessarily mean that you have sold your baby and you should retreat somewhere on a beach. 

 

There are very good examples (and we are not talking about the United States or UK, only, but also about what we have seen here, in Romania, while acting either for the investors or for entrepreneurs) of companies which, either in their incipient stages or in an advanced one, have recurred to private investors, being them either private equity funds or angel investors or mezzanine lenders, to finance the growth of their businesses and are now enjoying a great and stable market position.


It is the mere purpose of these investors to invest in one business, to help it grow and then to exit it when the right moment comes by:

  • selling their shares either to a third party (together with the entrepreneurs, to the extent the transaction is negotiated as such) (another private investor or a strategic buyer) or, more conveniently for many Romanian entrepreneurs
  • back to the entrepreneurs, who in the meantime reached a position that allows them to finance their business on its own or are willing to take the advantages of a business that has been stabilized during the period when the investors were there.

Furthermore, although there are cases when a private equity fund aims to acquire 100% of one business or, in any case, at least a controlling position, dealing with a private equity fund does not generally mean that you have to entirely sell your business or even to give up the control over it. Moreover, acquiring a minority position is a rule for angel investors and mezzanine lenders (in their case provided that they invest in equity).


And it is not just about money. A significant part of the investors are very much focussed on bringing management skills, industry knowledge, production knowhow, business connections to the company they invest in. They bring a completely new perspective to your business (through their own personnel or through different industry specialists they temporarily hire), which can enhance your business competitiveness, sales, etc.
 

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