Corporate Finance Pills (1): What is an equity kicker?

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An Equity Kicker is a capital incentive in which the lender provides credit at a lower interest rate and, in return, obtains an equity position in the borrower’s company. An equity kicker is structured as a conditional reward, in which the lender obtains ownership of the capital to be paid back at a future date when the company achieves specific performance targets.

Early stage companies use an equity kicker to access financing for their operations. They often find it difficult to attract investors, as they are relatively new and less likely to gain their confidence.

Equity kickers are typically used in LBOs, MBOs, equity recapitalisations or venture debt operations. Such transactions are considered too risky to attract traditional forms of debt. Therefore, mezzanine and subordinated financiers use equity kickers to compensate for the higher risk they take in lending to companies that do not have sufficient collateral for loans. Kickers use convertibility into shares or warrants at a future date and can be triggered by a sale or other liquidity events.

How does an equity kicker work?

Companies use an equity kicker to entice lenders to buy a bond or preferred stock of the company at a reduced interest rate. The lender can obtain an equity kicker from a minimum of 10% to a maximum of 80%, depending on the risk of the investment.

When a borrower attaches an equity incentive to the terms of the debt advanced by the financiers, this incentive is called a kicker. While on the one hand the lenders lend at a relatively low interest rate in relation to the risk of the transaction, on the other hand they obtain a share in the capital stock that can be exercised at a future date when a liquidity event occurs.

Uses of the equity kicker

Companies that offer an equity investment option cannot access credit from traditional funders. These funders usually provide loans to companies with adequate cash flow to service the loan, as well as a sufficient asset base to act as collateral for the loan.

Most of the companies that issue equity kickers are start-ups and early stage companies that have not yet accumulated enough assets. They offer a kicker as a way to attract investors who would otherwise not be interested in lending to the company.

Example 1: Equity Kicker

Let’s take the example of XYZ, a company that makes wine glasses. The company is in the process of expanding its manufacturing plant to increase annual production. XYZ has been operating for three years but is still unable to obtain bank or conservative financing due to its high perceived risk.

The company plans to raise 800,000 euros to finance this expansion. It can obtain 400,000 euros internally with the resources generated by the activity itself. On the other hand, the company plans to waive 10% of capital for every 100,000 euros borrowed from investors.

Three investors – A, B and C – join forces to finance XYZ’s expansion. Investor A is willing to provide 200,000 euros, while B and C are ready to contribute 100,000 euros each. This means that lender A gets an initial kicker of 20%, while B and C get 10% each. However, investors can only exercise the right to obtain shares at the time of sale of the company.

Example 2: Warrants

Suppose that the debt is structured as a guarantee, where lenders are given the option to buy a certain amount of shares at a certain price at a future date. For example, the borrower may give 10% guarantee coverage on the amount provided by each lender to the company.

Using the figures in Example 1, we can deduce that investor A will get EUR 20,000 in warrants, while B and C will each get EUR 10,000 in warrants for the company’s shares. The price of the shares will depend on the most recent round of capital.

The options of equity kicker lenders

Lenders provide financing to a company to help it meet certain performance targets and increase the value of the company above its current market value. In return, lenders obtain an equity stake that can only be paid out if a certain milestone or liquidity event occurs. If neither of these events occurs, the lenders will continue to maintain their equity position.

As shareholders, they benefit from regular dividend payments when the company’s financial results are published, as well as from a percentage of profits that is proportional to their percentage of equity. In the event that the company reaches a certain agreed-upon profit potential or when the owners decide to sell the company, the lenders are paid first when these events occur.

The equity kicker in the real estate sector

Equity kickers are also used in the real estate business. A lender may provide a real estate loan at a reduced interest rate in exchange for a share of the total income from the property. The kicker may be provided when the borrower lacks sufficient collateral to secure the loan, but is expected to be able to repay the loan with a potential for future earnings if he obtains funds to finance his operations or expansion.

The equity kicker can be structured so that the lender receives a percentage of the gross rental income generated by the property if it exceeds a certain agreed-upon amount. It may also depend on a future event, such as the sale of the property, where the lender will receive a percentage of the sale proceeds depending on the amount of its interest in the business.

For example, suppose a borrower borrowed 1 million euros to buy a luxury home. The borrower uses the loan to complete the purchase and renovate the home for lease. Immediately after the renovations, the value of the house doubles to 2 million euros, due to the growing demand for this type of property. If the borrower initially provided 10% equity to sweeten the deal, it means that the lender will get a 10% share of the value earned by the property once it is sold.

Altria achieved 56 million euros in financing for its clients in 2019

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The financial consulting firm for companies continues its upward trajectory and is positioned as the reference in obtaining bank and alternative financing for the segment of medium and large companies

The financial consultancy firm Altria Corpo, which specialises in medium and large companies, obtained 56 million euros in financing for its clients in 2019, an increase of 10% over the previous year and a new record for the firm. The loyalty of the companies that repeatedly trust Altria as their partner in obtaining financing, as well as the increase in the client base thanks to the expansion of its number of managers and consultants, have made these results possible.

Among the relevant operations that Altria has advised on are a significant number of long-term loans, for amounts between 1 and 3 million euros, to undertake new investments in companies from the most varied sectors. The financial providers that have granted this type of operation are banks, public entities and direct lending funds. As Ramiro Lama, Altria’s partner and head of financing, points out, “in this type of operation, with a high amount and where it is more difficult for companies to obtain financing, is where Altria can give greater added value to the relationship with its customers. Altria’s knowledge of the financial needs of its clients and its ability to structure these needs among the diversity of alternatives that are emerging in the Spanish and international markets, are the reason why medium-sized companies find in Altria the right partner to seek financing”.

Altria’s current team in Barcelona

For Altria, 2019 has meant a significant investment with the incorporation of new professionals, the expansion of financial providers such as national and international funds, as well as the search for operational excellence and customer service. This lays the foundation for serving larger companies and continuing to offer our clients the best financing solutions for their needs.

One of the company’s milestones in 2019 is the opening of its Madrid office, which will certainly enable the number of clients and the volume of advice to continue to grow this year. Other lines of business that are gaining in importance are strategic and financial consultancy, through which Altria helps clients to improve their financial management and the economic profitability of the business; advisory services for the purchase and sale of companies and the obtaining of capital and new partners; and the intermediation of real estate operations (residential, commercial and industrial).

Altria is a firm founded in 2014 by Albert Gumà and based in Barcelona. Its clients are medium and large companies, to whom it offers its experience in all types of debt and equity financing, and access to more than 150 financial providers including banks, alternative financing, public financing, debt funds and other instruments. In its 6 years of existence, Altria Corpo has positioned itself as a reference in the search for financing for medium and large companies, with an accumulated amount of advice of more than 240 million and more than 400 operations. The scope of the companies advised covers the entire Spanish territory, with a concentration in Catalonia, which represents 80% of the total advised.

Altria Corpo and Coordinadora Sinergia Social, a successful collaboration

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Since 2014, AltriaCorpo has accumulated numerous success stories in its relationship with medium and large companies. One example is the fruitful relationship that has been established between Altria and the group of entities and foundations that make up the Coordinadora Sinergia Social, a reference in Catalonia for the so-called Third Sector of Social Action, which includes those private non-profit entities that work for social inclusion and cohesion.

The Coordinadora Sinergia Social offers to the entities that advice a whole series of specialized services of management, with criteria of quality and efficiency. The entities, from different legal forms and areas of specialisation, carry out the direct activities and execute their programmes, both in terms of attention to certain groups at risk of exclusion, as well as training and job creation. With its professional management, the Coordinator supports these entities to achieve technical and economic sustainability, and in turn allows them to focus on their field of experience: people care.

Among the wide range of management services that the Coordinator offers to entities (Human Resources, Labour Management, Accounting, Administration, Treasury, Billing, Communication, Information Technology) is also the financial function. It was also necessary to invest a lot of time and resources in this function since it was an obvious need and of great strategic importance, the constant search for resources to finance the investment projects of the different entities. For this reason, they saw that it could be very beneficial to collaborate with a specialist in financial intermediation such as AltriaCorpo.

Josep Maria Poblet, Consultant Corporate Division at Altria Corpo

In the words of the manager of the Coordinadora Sinergia Social, Domènec Domènech, “when we got to know Altria and the value it could bring us, we saw the process of outsourcing the search for financing as very logical. Not only has it prevented us from spending a lot of time talking and negotiating with banks for each investment project, but it has also allowed us to expand the number of financial providers, some of which were beyond our reach“.

Another aspect that Coordinadora Sinergia Social values about Altria is its knowledge of the whole spectrum of financing and, above all, knowing how to find the best solution for each need. The manager, Mr. Domènech, explains it this way:

“Sometimes companies, out of ignorance or because they do not find any other solution in the banks with which they work, obtain financing that does not fit their needs. For example, they finance long-term investments with working capital solutions. Altria makes a clear diagnosis of what the financial need is and finds the best way to cover it among the available financial providers“.

For AltriaCorpo, the relationship with Coordinadora Sinergia Social has also been very positive. Altria consultant Josep Maria Poblet, who is in charge of the relationship with the Coordinadora, adds the following point:

“Altria was already a reference in financial consulting for medium and large companies, but the relationship with Coordinadora and its group has allowed us to understand much better the specific needs of the so-called Third Sector, which represents 4.6% of the total labor market in our country, and contributes 1.5% of GDP). Without a doubt, we have established a relationship that will continue to provide much to both parties”.

Direct lending, a financing alternative for medium-sized companies

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Direct lending is a type of corporate debt in which lenders other than banks lend to companies without intermediaries, such as an investment bank, a broker or a private equity firm.

In direct lending, borrowers are usually small or medium sized companies, rather than large listed companies, and lenders may be wealthy individuals, family offices or asset management companies.

Direct lending has found its place thanks to the reduction in volumes that traditional banks have experienced in lending to companies. The reason for this reduction can be found in the increasingly harsh regulation of corporate lending, which forces banks to provision more capital each time they grant a loan.

This has provided an opportunity for a growing group of asset managers to start lending, from which both medium-sized companies and larger corporations (through syndicated loans) have benefited. It has also benefited investors in these direct lending funds, which were looking for a response to the very low market returns in recent years.

The global volumes of these private debt funds have grown steadily and now stand at over $100 billion.

Global volume transacted in direct lending, in billions of dollars

Despite this boom in direct lending around the world, in Spain it is still a very unknown instrument for medium-sized companies, as are a multitude of alternative financial solutions to banking. Altria Corpo wants to help these companies, advising them on the best financing solution for each case, and giving them access to the more than 100 financial providers it currently has.

Altria Corpo intermediates in 2018 more than 51 million euros in financing companies

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The financial consultant Altria Corpo, specialized in medium and large companies, achieved last year more of 51 million euros of financing for its clients, which represents a new record for the firm. The number of successfully advised transactions reached 83, which is also higher than in previous years.

The operations advised cover a wide range of typologies, but the most important are those that for companies are more difficult to grant, such as long-term loans and high amounts, which make it necessary to structure the financing between different financial providers. The knowledge of all the possible alternatives and the coordination work throughout the funding process is the value added that the companies advised by Altria most appreciate. The operations of financing can be moved in the range of 500 000 euros up to 10 million euros.

In the words of Ramiro Lama, partner and head of Finance for Altria Corpo, “the great growth of Altria Corpo reaffirms that it is necessary a service for medium and large companies that solve their financial needs, both debt and capital. The added value that we give to our clients is the knowledge that we have of the wide range of funding that exists and that goes far beyond than that offered by banks, as well as our contribution of value in the analysis and design of the operations in which we collaborate.”

The growing financial disintermediation is widening the options for companies, with more and better financing alternatives for them. However, this large number of options are not known by companies, and that is why they rely on the advice of Altria Corpo to give them access to the best option within this wide range of financial providers that exist today, and which is sure to grow exponentially in the future.

Ramiro Lama and Albert Gumà, partners of Altria Corpo

The firm, founded in 2014 by Albert Gumà and with headquarters in Barcelona, has as clients medium and large sized companies, to which it offers its experience in all kinds of financing by means of debt and equity, and access to more than 120 financial providers among banks, alternative financing, debt funds and other instruments. In its 5 years of existence, Altria Corpo has positioned itself as a referent in the search for financing to medium and large companies, with a cumulative advised amount of more than 180 million and more than 330 operations. The scope of the companies covers the entire Spanish territory, with a concentration in Catalonia, which represents 85% of the total number advised.