• Timely access to capital is often the most important for business or transaction success. Independently of the purpose of raising capital, GRUBISIC & Partners could assist you in the process of raising capital. There are two main categories of capital – equity and debt. Repayment of loans and debt servicing has priority in relation to dividend payment. At the same time, creditors or investors in debt could have physical security in form of collateral as opposed to equity holders or investors in equity. Since equity holders are exposed to higher risk, they require higher return on their investment. Accordingly, equity is more expensive source of financing than debt. There are various types of financing some of which have characteristics of both debt and equity – one example is convertible debt (debt which could be converted to equity under certain conditions). Also, some creditors could accept that repayment of their debt is subordinated to debt of some other creditor if in return they could receive higher interest rate. This source of financing is usually called mezzanine capital.
  • Regardless of a type of instrument (source of financing) it is important to understand that every (rational) investor invests expecting certain return from some type of future cash flows of the company and is interested whether the company (or project) will be able to create enough cash flows to settle its liabilities (investment risk). To simplify, return on investment expected by the investor represents compensation for the willingness to wait and worry at the same time.
  • There is unlimited number of possible types and financing instruments – instrument can easily be created if there is an interested investor for such instrument. We have listed below selected long-term sources of financing, rated from least to most expensive ones, including the most common investors in such instruments.
    • Bonds (investment funds, insurance companies, pension funds, commercial banks)
    • Collateralised loans (commercial banks)
    • Non-insured loans (commercial banks)
    • Subordinated debt (mezzanine funds, EBRD, IFC etc.)
    • Convertible debt (EBRD, IFC, mezzanine funds, individuals)
    • Preferred shares (institutional investors, strategic investors, individuals)
    • Ordinary shares (strategic investors, EBRD, IFC, private equity funds, individuals)
Equity raising
  • In case of corporate financing, a company would usually raise equity through recapitalisation. In recapitalisation, the company’s capital is increased via input of additional assets, rights or most frequently in cash, by existing or new investors. Some of possible reasons for recapitalisation are as follows:
    • The company is growing rapidly in terms of revenues thus increasing assets of the company which cannot be financed from internally generated funds (earnings) while creditors are not prepared to approve additional financing since there are no adequate collaterals. In case of increase in revenues, parts of assets are growing spontaneously (receivables and inventories) while other parts increase as a result of management decision (e.g. decision on investment in equipment which supports higher production and sales).
    • The company has opportunity to invest in profitable projects (acquisitions, production equipment, development of sales channels, etc.) but has limited debt capacity in balance sheet (or the capacity exists but would be even higher if equity further increases).
    • The company would like to change existing (aggressive) capital structure in order to repay part of the existing debt with the funds raised through recapitalisation which could result with lower cost of debt due to decreased risk.
  • Recapitalisation by new investors will reduce relative share in equity of the existing equity holders. The key issue for the existing equity holders is whether the value of smaller participation in ownership (e.g. in 3, 5 or 7 years) will be higher than what would be the value of the existing share. From the economic perspective, it is better to be owner of smaller part of a bigger cake than be the sole owner of a small cake (if the cake has not become big enough). Therefore, as the first step, existing equity owners should perform valuation of the company in two scenarios: (1) existing, stand alone value; (2) value under the assumption that the company performs recapitalisation and uses those funds for financing further growth, if possible.
  • After the decision on recapitalisation is made, it is necessary to determine adequate type of investor. Out of many possible split of investors, the most common one is strategic and financial investors. Motivation of both is to create value i.e. realisation of acceptable rate of return on their investment.
    • Strategic investors are usually companies from the same, similar or complementary industry and apart from cash for recapitalisation could bring some know-how, strengthen existing management, reduce costs, open new sales channels, etc. which could result in synergy effects. It is probable that strategic investor would require an active role in the company’s management after recapitalisation (role in management board) and adequate representation in supervision (supervisory board or similar).
    • Financial investors are usually institutional investors such as venture capital or private equity funds with up front defined investment strategy in sectors or industries, minimum equity participation and minimum management and controlling rights. Financial investors do not have intention to stay in such equity structure permanently. When considering entrance in ownership structure, financial investors, among others, estimate the capability of exit from such structure in the period from 3 to 5 years. The most common exit from ownership structure is through sell of stakes to other co-owners, management, strategic investors, other financial investor or through initial public offering (IPO). As opposed to strategic investors, financial investor will not actively participate in day to day operations and management (since they are not likely to invest if they don't believe in company’s management ability to increase value of their invested funds), but they will bring necessary financial resources, financial skills and business network. They will actively supervise company’s operations and participate in taking important strategic decisions (capital expenditure, additional funding, appointing management, acquisitions, dividend payment, etc.).
    • Ultimate motivation of strategic and financial investors is identical – to realise acceptable rate of return on their investment. Thinking that financial investors are motivated with earnings and strategic investors with other things would be incorrect. If an investment does not have a potential to generate sufficient positive future cash flows, it is not economically acceptable and will not attract neither strategic nor financial investor. The difference between strategic and financial investor is primarily in their experience in core business (strategic have more experience than financial), financial skills (financial have more financial skills than strategic), involvement in operational management (strategic will be more involved than financial), the potential to acquire additional funding (financial investors are more sophisticated and creative in acquisition of new funding) and duration of investment (financial investors generally do not intend to stay in ownership more than 5 to 6 years).
  • GRUBISIC & Partners will assist you in structuring, preparation, management and conclusion of company's recapitalisation. Among other things, we will structure the transaction, perform company valuation, prepare information memorandum, identify relevant investors, organise and coordinate due diligence, prepare management for meetings with investors, advise you in negotiations and finally conclude transaction.
Raising debt
  • The most common forms of debt are loans from commercial banks or supra-national institutions such as EBRD or IFC and issuing debt instruments (bonds of various types, commercial papers, etc.). Raising debt in context of corporate finance relates to long-term debt, smaller part of which could be used for working capital (financing the operational cycle). There are few important differences in financing through issuing bonds vs bank loans and we will emphasise the fact that issuing of debt instruments can be partly regulated by capital market’s regulator and that investors will probably not require physical collaterals (most often the only guarantee is trust in the company’s management and company’s business plan together with certain financial covenants to be met or maintained).
  • We have listed below some information which might be of investor’s interest while considering becoming a creditor of the company:
    • Purpose of funding (refinancing existing debts, capital expenditure, acquisitions, etc.)?
    • What is the existing level of indebtness ( e.g. ratio of net debt to EBITDA, debt to equity ratio)?
    • Will future free cash flows be sufficient for servicing all debts with no interruptions? What is current degree of operating and financial leverage?
    • What is the level of priority in servicing debt in respect to other creditors (subordinated debt will be repaid after repayment of first class debt)?
    • What types of collaterals could be offered (real estate, shares or stakes in the company, guarantee of parent company, etc.)?
    • Is there an access to other sources of financing in case of necessity?
    • In case of project financing, what is the percentage of investor’s funds?
    • In case of acquisition financing - how does balance sheet of the target company look like, what would consolidated balance sheet look like after the acquisition and what is the percentage of own funds (equity) in transaction financing?
  • It is expected that creditors would set certain financial covenants during loan repayment period in the form of maintaining certain level of financial indicators or ratios, representing control mechanism or early warning system. Usually this relates to liquidity ratios, debt to EBITDA ratio, etc. Apart from that, depending on the purpose of financing and the form of debt, the creditor could demand from company to have certain business decisions approved by the creditor – e.g. permission prior to carry on heavy capital expenditures, dividend payments, etc. One of possible items can be treatment of debt in case of change of control in company's ownership structure; a creditor could require that in case of a company sale the entire debt becomes due.
  • The chances for successful debt raising are higher if there is an organised process with the production of adequate documents and financial models. At the same time, financing should be adequately planned since current decisions on type, amount and form of debt affect future business and possibility of refinancing. Therefore, GRUBISIC & Partners could help you with the following:
    • Transaction structuring and preparation
    • Creation of business plan
    • Preparation of financial model
    • Identification, contact and correspondence with potential investors
    • Organisation of due diligence (if necessary)
    • Evaluation of offers
    • Coordination of work of other advisors (lawyers etc.)
    • Advisory during negotiating conditions (e.g. financial covenants)
    • Creation of transaction documentation and closing of transaction
  • When additional capital is necessary, the process of raising debt or equity might be perceived as too long. Experience and practice, however, indicate that greatest alies in the process of capital raising are the following:
    • Systematic approach (do not skip steps and do not try to look for too many shortcuts)
    • Good quality business plan (be optimist but stay realistic)
    • Professional financial model (the model should prove to investors that in different scenarios the business has capacity of generating sufficient cash flows)
    • Patience and readiness to negotiate (investors will often require conditions precedent i.e. fulfilment of numerous conditions or preconditions to finally invest their funds)

For detailed scope of activities performed by GRUBISIC & Partners within this service please visit

Scope of activities