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Benefits of flexible capital

July 21, 2025
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The private direct lending market is a critical and growing source of capital for independently owned middle market companies (family owned, entrepreneur owned, employee stock ownership plan (ESOP) owned, etc.). However not all business owners are aware of all the accretive ways they can utilize this capital to generate value. There are various strategic uses of proceeds that can increase shareholder wealth if implemented correctly.

These strategies can be amplified when borrowing from a direct lender, Principal Alternative Credit, given the inherent advantages of raising capital from a non-bank lender over borrowing from commercial banks. Typical results may include higher loan amounts, less annual principal amortization, more flexible covenants, the ability to grow through mergers and acquisitions (M&A), and no borrower/personal guarantees. Further, given that direct lenders rely on the going concern enterprise value of the business rather than asset values, service-focused businesses have access to debt capital that once was reserved only for asset-heavy businesses funded through commercial banks.

Accretive uses of flexible debt capital

Organic expansion capital

Organic growth opportunities can require additional capital investment; equity may be too expensive or unappealing to existing shareholders, and commercial bank debt may be too restrictive. Capital provided by direct lenders can provide the right balance of reasonable cost and flexibility.

Examples of growth-oriented financing opportunities include: (i) Capital expenditures to fund business expansion (for example plant expansion, new equipment), (ii) Personnel growth to support new geographies, new product/service lines, expand support services, etc.; and (iii) Working capital associated with organic growth opportunities.

Acquisitions

Acquisition opportunities may arise through in-bound passive requests, through a proactive acquisition strategy, or anything in between. The ability to raise capital when an opportunity arises is a critical step towards being viewed as a legitimate/valid acquirer.

A direct lender can assist in structuring the funding to incorporate the cash generated by the target company. This will help to maximize debt availability, and to stage the funding to match the cadence of the acquisition strategy. And given the often borrowerfriendly amortization structures, capital provided by a direct lender can provide the appropriate cash flow flexibility to ensure the post-transaction integration can absorb any unforeseen glitches.

Create cash flow flexibility

Replacing existing commercial bank debt that carries a heavy amortization schedule with debt provided by a direct lender that offers low annual amortization can create cash flow flexibility for any company. This creates opportunities to invest excess cash flow back into the company’s growth opportunities or even just create a cash cushion. Other typical benefits of a direct lender loan include higher loan amounts, more flexible covenants and no personal guarantees that further add to the appeal for business owners.

Buyout a minority partner

It is common to have equity partners that have different investment time horizons, whether they know this at the beginning of the business relationship or their desires and liquidity needs evolve over time. In addition, many businesses begin with several minority equity partners to fund operations and growth, and the majority shareholders may want to eventually reward these partners with liquidity prior to the owner/operator’s liquidity event or may want to consolidate ownership to streamline the equity structure.

In certain cases, these buyouts can be funded out of the company’s cash flows. However, in most cases outside capital is needed. Capital provided by a direct lender can be viewed as an attractive alternative to bringing on another equity partner to fund the buyout(s) and less restrictive than borrowing from a commercial bank.
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Risk Considerations

Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

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MM13666-02 | 06/2025 | 4576350-122026