Use of Bridge Loans in Private Equity

Private equity comprises of capital that’s not mentioned on a public exchange. It’s made of investors and funds that invest in private companies directly. It requires you to have enough funds at your disposal to react to a potential profitable purchase quickly. But what happens if the funds needed to exceed the sum you have? Bridge loans help to fill that gap.

Increasing the Use of Bridge Loans

According to statistics, more than half of the US’s private equity firms have used bridge loans. Due to the Global Financial Crisis of 2008, bridge loans have become instrumental in any investment process. With a 20% increase in 2018, the bridge loan market sits at $ 500 billion.

Why Bridge Loans?

Firstly, bridge loans can provide quick capital for time-sensitive investments. It enables private equity firms to support their short-term obligations and lessen the administrative burden for them.

Secondly, bridge loans inflate IRR (rate of return) — a measure used by fund managers to analyze different investment ventures.

Thirdly, bridge loans don’t increase the debt burden for private equities, and consequently, the fund’s capacity doesn’t rise for investment.

approved loan application on a table

Risk for Investors and Private Equity Funds

For starters, the repayment terms for bridge loans have increased for as long as one year, killing the purpose of short-term financing. It impacts the internal rate of return and increases it due to time and not for profits.

Bridge loans reduce the number of capital calls, growing the risk that investors may default on their capital calls as they increase in size.

Moreover, issues may come up from the inconsistency of the information provided. It’s because private equity funds aren’t required to submit any information on what they’ll use the bridge loan for.

Regulation of Bridge Financing Used by Private Equity Funds

Bridge loans are neither subject to disclosure requirements nor regulated. According to ILPA, private equity funds should use bridge loans to increase IRR and the advantage of the partnership.

In 2019 ILPA issued a report which said that the duration of bridge loans shouldn’t go beyond 180 days and should be capped at a maximum of 20% of the committed funds. It also added that there must be a quarterly disclosure of all the information about the size, cost, and terms of the bridge loans issued by private equity.

In the coming years, bridge loans will increase, and it’s expected that its liquidity will stay high motivating non-traditional lenders to emerge in the market.

Looking for a Bridge Loan?

GCP Fund can help you. They provide bridge financing services for investors and businesses across Tampa, Miami, and Jacksonville, FL. Their services have been designed to offer quick financial solutions in cash-strapped conditions. They also provide asset-based lendingconstruction financing, and commercial financing options for their clients.  Get in touch with them to know more.

Categories: Finance

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