Private Finance: What is it, and when would I use it?

By Stephen Clark | Sunday 3rd December 2023 | 13 minute read

Private finance refers to financial activities, transactions, and funding sources outside the public markets, typically arranged between private entities when discreet, flexible, high-value financing is required.

Private finance, distinguished by its operations outside public markets, offers a discreet, flexible, and customisable approach to financial transactions, including a wide array of activities such as bridging loans, development finance, and investments, tailored to meet the specific needs of private entities, high-net-worth individuals, and family offices, with less regulatory scrutiny and a focus on confidentiality.

This article provides an overview of Private Finance, including its definition, types, and goals. It also discusses its advantages and disadvantages, who gives it, and the concept of angel investing. It also provides information on how to apply for Private Finance and the role of brokers in navigating investment opportunities.

Private finance

What is Private Finance?

Private finance refers to financial activities and transactions outside public markets, typically between private entities (individuals and privately held incorporated entities). It includes a range of debt—and equity-based financial mechanisms.

Below are the most common forms of debt and equity private finance used for Bridging, Development, or Business Finance without relying on traditional public financing options like bank loans or public equity.

Debt-based Private Finance

Equity-based Private Finance 

100% Structured Finance

Senior Debt Finance

Preferred Equity Finance

Stretched Senior Debt Finance

Equity Finance

Subordinate Debt Finance

Joint Venture Finance

Mezzanine Debt Finance

 

Private finance offers more customisable and flexible financial solutions, often tailored to specific project requirements or investment criteria. As private finance arrangements are not publicly accessible, it facilitates confidential transactions. However, due to the increased risk involved, this type of finance comes with higher interest rates or more stringent repayment conditions.

How does Private Finance differ from public finance?

Unlike public finance, which involves transactions in the public markets where securities are bought and sold openly, private finance transactions are conducted more discreetly and often negotiated. Private finance encompasses a broad range of financial activities, including bridging loans, development finance, investments, and other financial arrangements, which occur in, as the name suggests, 'private'.

How big is the private finance market vs the public finance market?

The private finance market is much smaller than the public, at less than 10% of its size ($10 trillion for private markets versus $124 trillion in 2021, according to SIFMA and McKinsey). As such, they represent a much smaller investment opportunity for private financiers. 


Can Private Finance include both debt and equity financing?

Yes, private finance can encompass both debt and equity financing. Debt financing involves borrowing funds that must be repaid over time with interest, while equity financing involves raising capital by selling company shares, thus exchanging ownership stakes for funding. Private finance allows businesses to access capital without relying on traditional bank loans or public markets. Private financiers can also combine investment strategies to enable the company to meet its financing obligations or fulfil its full potential. This flexibility allows companies to choose the most suitable financing method or methods based on their financial health, growth stage, and strategic goals, allowing for a tailored approach to funding that aligns with their unique needs and circumstances.


What are the primary goals of Private Finance?

The primary goals of private finance revolve around providing capital to businesses or individuals for various purposes, such as starting or expanding a business, developing new products, or investing in real estate. Doing so aims to achieve a return on investment that compensates for the risk taken. Private finance supports economic growth by enabling ventures that may not qualify for traditional bank or public financing to access the necessary funds. It seeks to create long-term value through strategic investments and partnerships. Private finance plays an important role in the financial ecosystem by bridging funding gaps and facilitating wealth generation for investors and recipients.


When would I use Private Finance?

You would use private finance when seeking flexible, tailored funding outside traditional banking systems, institutional lenders or public markets, particularly for situations requiring quick financial support or projects that may not meet conventional lending criteria. This could include launching a startup, funding growth or expansion activities for an existing business, real estate property development, or investing in innovative projects with high growth potential. Private finance is also ideal for entities seeking strategic partnerships and investments that offer capital, expertise, and networking opportunities to drive their venture forward. It caters to those who prefer more personalised financial solutions and are willing to engage with private investors, such as family offices, venture capitalists, angel investors, or private equity firms, to achieve their financial goals.

Investments in Private Companies: Utilising private finance to invest in private companies allows investors to directly inject capital into businesses with the potential for significant growth, bypassing public markets. This form of investment typically aims to acquire equity stakes, offering the investor a share of ownership and a proportionate share of the company's future profits while providing the company with crucial capital for expansion, operational improvements, or product development.

Private Finance for Debt Transactions

In debt transactions such as bridging loans or development finance through private finance, investors lend money to businesses or individuals under agreed terms and conditions, including interest rates and repayment schedules. Unlike equity investments, debt financing does not confer ownership in the company but prioritises the lender for repayment before equity investors. It is often used for short-term financing, refinancing, or capital for growth initiatives, providing a fixed return to the lender.

Private Finance for Venture Capital and Startups

Venture capital, a key component of private finance, involves investing in startups and early-stage companies with high growth potential in exchange for equity. Venture capitalists not only provide capital but often contribute valuable guidance, management expertise, and access to a broader network of potential partners or customers, significantly impacting the success trajectory of the funded ventures. The amounts raised with Private Finance for startups in their first round of funding (seed funding) are, on average, £1.18m ($1.5m), according to a study by CB Insights. 

Private Finance for Real Estate Financing

Private finance in real estate involves using private funds to develop, acquire, or refurbish property. This can range from residential projects to large commercial developments. Private real estate financing is attractive for projects that may not initially qualify for traditional bank loans due to their risk profile or the need for rapid funding. It offers flexibility in terms and conditions tailored to the project's needs. European real estate provided the third-best 10-year annualised returns of any asset class at 7.98% as of 2024, according to JLL, which demonstrates how lucrative the property development sector is for private financiers.


How much can I borrow with Private Finance?

The specific circumstances or your requirements, together with the investment opportunities it presents to a private financier and their circumstances, will determine the amount being sought or offered for any given transaction.

What is the largest private financing example?

£22.2bn ($29bn) was the largest private equity fund ever raised in 2023 for CVC Capital Partners, meaning that, whilst unlikely, the technical limit would equal the largest fund that could support it. Our Private Finance lender's loan size typically ranges between £1m-£25m; however, they can facilitate lending up to £250m.

The amount you can borrow with private finance varies widely and depends on several factors, including the nature of the project or investment, the risk profile, the borrower's financial health, and the specific terms set by the private lender or investor. For startups and businesses, the investment size often correlates with the venture's growth potential and the amount of equity the owners are willing to exchange. In real estate and debt transactions, the loan amount usually relates to the value of the collateral, the feasibility, and the gross development value once completed. Ultimately, the amount borrowed through private finance is negotiated case-by-case, tailored to meet the lender's risk management requirements and the borrower's funding needs.


4 Advantages of Private Finance

The 4 main advantages of Private Finance are reduced regulatory scrutiny, customisation and flexibility, a diverse mix of financial options (debt and equity) and confidentiality. Let’s examine each of these in more detail.

1. Less regulatory scrutiny

Reduced regulatory scrutiny in private finance is considered a significant advantage. It enables more flexible and quicker transactions by sidestepping the procedural complexities of traditional banking and public markets. Businesses and entrepreneurs benefit from faster access to capital, minimised paperwork, and the opportunity to craft mutually beneficial, customised deals outside the strictures of regulated finance. This flexibility also highlights the need for thorough due diligence and clear agreements.

2. Customisation and flexibility

Unlike traditional finance's rigid, regulated options, private finance's customisation and flexibility provide tailored financial solutions that meet borrowers' needs. This adaptability allows for funding that suits various project timelines, cash flows, and risk profiles, enabling growth and innovation beyond traditional finance limits. Direct negotiations with financiers also lead to bespoke agreements, giving businesses and individuals a competitive edge in fast-paced or niche markets.

3. Diverse financial products

The diversity of financial products in private finance, including equity, debt, mezzanine financing, venture capital, and peer-to-peer loans, offers tailored solutions for varied borrower needs, from short-term liquidity to long-term growth. This variety enables customised risk management and returns optimisation, highlighting private finance's role as a flexible tool for effective financial strategies.

4. Confidentiality

Confidentiality in private finance ensures transactions remain private, unlike public options that mandate financial disclosures. This privacy allows entities to secure funding and negotiate deals without exposing financial details, which is crucial for maintaining competitive edges and managing sensitive information. This trust-based, discreet approach safeguards interests and underpins successful financial partnerships.


What are the disadvantages of Private Finance?

While private finance offers several benefits, it also comes with disadvantages, including potentially higher costs and interest rates compared to traditional financing due to the perceived higher risk by private lenders. Although beneficial for speed and flexibility, the lack of regulatory oversight can lead to less protection for borrowers, making due diligence paramount. The negotiation process can be complex and time-consuming, requiring a deep understanding of financial terms and conditions. Additionally, relying on private finance might limit access to larger capital markets and involve giving up equity or accepting more stringent repayment conditions. Thus, while private finance can provide vital capital, it necessitates careful consideration of its terms and implications.


Who provides Private Finance?

Private finance is provided by diverse entities and individuals outside traditional banking and public capital markets, including private equity firms, private investors, venture capitalists, angel investors, family offices, and peer-to-peer lending platforms. Private equity firms and venture capitalists typically focus on investments in startups and growth-stage companies with high potential for returns. Angel investors are affluent individuals investing their personal funds in early-stage ventures. Family offices manage the wealth of high-net-worth families, offering bespoke investment solutions. Peer-to-peer platforms facilitate direct loans between individuals and businesses, bypassing conventional financial intermediaries. Each provider brings unique preferences, terms, and investment strategies to the table, catering to various sectors and stages of business development.


Which lender is best for Private Finance?

Determining the best lender for private finance hinges on the borrower's specific needs, circumstances, and goals, but here’s a guide to which private financier is best suited to each typical situation.

  • Venture capitalists or angel investors are usually a good fit for startups and businesses seeking equity investment and mentorship. 
  • Family offices and private investors are often well suited to real estate developers and high-value investments that require bespoke bridging loan lending and a personalised approach.
  • Private equity firms are more likely to be suitable for larger established companies, such as medium-sized enterprises aiming for significant growth or restructuring. 
  • Private investors offering debt financing may be a good option for individuals or businesses looking for flexible, short-term loans. 

Ultimately, the choice of lender should align with the project's scale, the desired level of involvement from the financier, and the financial terms that best fit the borrower's strategy and risk tolerance. If you’re unsure which financing or financier would best suit your needs, contact a finance broker (like us) to get help understanding your options.

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Can you explain the concept of angel investing within Private Finance?

Angel investing within private finance involves affluent individuals, known as angel investors, using their personal funds to provide capital to startups or early-stage companies in exchange for equity ownership or convertible debt. These investors offer financial backing and often contribute valuable expertise, industry contacts, and mentorship to help the businesses grow and succeed. Angel investing is considered high-risk, high-reward in nature, as investors seek to support innovative ventures with the potential for significant returns on their investment. This financing plays a crucial role in the startup ecosystem, bridging the gap between initial seed funding and larger venture capital investments.


What criteria do Private Financiers consider when evaluating a funding request?

Private financiers evaluate funding requests based on quantitative and qualitative criteria to assess the potential return on investment and risk level. The business model's viability, market potential, the management team's experience and track record, and the growth strategy's clarity are key considerations. They also scrutinise financial health through revenue projections, cash flow analysis, and capital structure. The valuation and equity stake on offer is crucial for equity investments, while collateral, repayment plans, and interest rates are significant for debt financing. The uniqueness of the product or service, competitive advantage, and regulatory environment may also influence their decision. Financiers seek a compelling case that balances potential high returns against acceptable risk.

How can businesses negotiate better terms with Private Financiers?

Businesses can negotiate better terms with private financiers by thoroughly preparing and presenting a compelling business case that underscores the potential for high returns with manageable risks. Demonstrating a clear understanding of the market, having a solid business plan, and showcasing a strong management team can significantly strengthen the negotiation position. It's also beneficial to highlight unique value propositions, competitive advantages, and traction gained so far. Businesses should understand the financier's preferences and past investments to tailor the pitch accordingly. Engaging in transparent discussions about expectations and being open to feedback can foster mutual trust. Lastly, considering multiple financing options can provide negotiation leverage, showing readiness to explore alternatives if terms aren't favourable.

What are the alternatives to Private Finance?

Alternatives to private finance include traditional bank loans, government funding, crowdfunding, public financing options like grants or loans, public-private partnerships, cooperative financing, and internal financing through savings or retained earnings.

1. Traditional Bank Loans

  • What it is: Loans provided by banks to businesses based on creditworthiness and financial history.
  • How it works: Businesses apply for a loan, and banks assess their financial health. If approved, they offer repayment terms.
  • Pros: Lower interest rates, well-regulated.
  • Cons: It requires a strong credit history and often involves extensive paperwork and slow processing.

2. Government Grants and Funding Programs

  • What it is: Non-repayable funds government bodies provide to support specific industries or initiatives.
  • How it works: Businesses apply for grants fitting their project or sector; approval leads to funding without equity loss or repayment requirements.
  • Pros: Non-repayable, supports growth without debt.
  • Cons: Highly competitive, restrictive eligibility and usage criteria.

3. Crowdfunding

  • What it is: Raising small amounts of money from many people, typically via online platforms.
  • How it works: Businesses pitch their project online, and individuals contribute funds in exchange for rewards, equity, or debt repayment terms.
  • Pros: Access to a vast pool of investors marketing benefits.
  • Cons: It can be time-consuming, success is not guaranteed, and it may require giving up equity or offering rewards.

4. Public Equity and Debt Financing

  • What it is: Raising capital by selling shares or bonds to the public in financial markets.
  • How it works: Companies list shares (equity financing) or issue bonds (debt financing) on public exchanges, accessible to investors worldwide.
  • Pros: Access to large amounts of capital liquidity for investors.
  • Cons: Significant regulatory requirements, loss of control for equity financing, interest obligations for debt financing.

How do I apply for Private Finance?

Brokers are often used to raise private finance. They serve as intermediaries between businesses seeking capital and potential financiers, including private investors, venture capitalists, private equity firms, and other sources of private finance. Brokers possess in-depth knowledge of the finance market and have networks of contacts, which they leverage to match businesses with appropriate funding sources. They understand different financiers' criteria and can advise businesses on the best approach to meet those criteria. Additionally, brokers can assist in preparing financial documents, refining business plans, and negotiating terms to ensure the financing aligns with the business's needs. Their expertise can significantly streamline the fundraising process, increase the chances of securing funding, and potentially secure more favourable terms for the business. 

Can I go directly to a Private Finance lender?

You can also apply directly to the private finance lender for private finance. However, doing so requires the borrower to address the following issues or risk not securing the finance on terms or rates that meet their expectations.

  • Lack of Negotiation Leverage: Without comparative offers, you might not have the leverage to negotiate better terms. A broker can bring multiple offers, creating competitive tension among financiers.
  • Limited Market Knowledge: Financiers have deep knowledge of their terms and conditions but may not offer the best deal in the broader market. Without extensive market research, you might miss out on more favourable options.
  • Risk Assessment: Directly approaching financiers without thorough preparation could expose your business's weaknesses more starkly, potentially affecting terms or the likelihood of securing finance.
  • Complexity of Terms: Private finance agreements can be complex. Without prior experience or a professional advisor, you might not fully understand the implications of certain terms, leading to unfavourable conditions.
  • Due Diligence and Privacy: Direct applications involve sharing sensitive financial information. You need to understand a financier's due diligence process to avoid exposing confidential information unnecessarily.
  • Deal Fatigue: Approaching multiple financiers directly increases the risk of deal fatigue, where lenders become less interested if they perceive a deal has been shopped around extensively without securing financing.
  • Time and Resources: Identifying, approaching, and negotiating with financiers can be time-consuming. Without the right contacts, you may expend significant resources without guaranteeing success.

Using a broker or financial advisor can mitigate these risks, leveraging their expertise, network, and understanding of finance terms to navigate the process more effectively and secure the best possible outcome.


Conclusion: Flexibility, Confidentiality, and the Role of Brokers in Navigating Private Finance

Private finance embodies a spectrum of debt and equity financing mechanisms that provide a broad array of financial needs, from entrepreneurial ventures and real estate developments to bespoke investment opportunities. Its appeal lies not only in its flexibility and customisation but also in the confidentiality and reduced regulatory oversight that underpins its transactions. When you’re ready to unlock the potential of private finance, a broker can serve as your navigational aid, and you’ll be able to leverage their market expertise and networks to bridge the gap between you and potential financiers, often securing more favourable terms. 


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