The challenges of rising borrowing costs and an assessment of alternative financing options.
Can private debt help companies transform?
By Matthias Holzamer and Markus Held
Strapped for cash from conventional sources, businesses in need of transformation are discovering other attractive financing options
Companies face a serious dilemma: How to invest heavily
in multi-faceted transformation while economic growth and
profits flatline
German companies, already struggling with flat growth at home and now battered by an unprecedented polycrisis, are in desperate need of transformation on multiple counts. But transformation costs money. And as high interest rates add to the generally grim picture, the question is: Where can they source the necessary funding if bank loans and equity options are hard to come by?
"In times of polycrisis CFOs need to constantly evaluate all financing options – private debt is becoming increasingly relevant."
Our new report digs deep into the dilemma facing organizations caught between a rock and a hard place: German companies know they must invest heavily in digitalization, in AI and also in sustainability to avoid falling further behind European and global competitors. But how are they to fund such moves when economic growth is flat, profits are meager and business confidence is at such a low ebb?
Analyzing the financing options
With cheap money evidently off the menu for the foreseeable future, higher interest rates stand out as a key point of pain: In Germany, for example, interest expenses essentially doubled between 2022 and 2024. And although the rise in rates appears to have slowed or halted for now, the already reached levels are expected to add a further EUR 1.9 billion to the overall burden in 2025. In the current climate of uncertainty, it is hard to predict the precise direction financing terms will take in the next few years. That said, the situation is tough enough as it is, and now is the time when companies need transformation funding.
"Financing transformation challenges are often dependend on hybrid or equity-like capital structure solutions which in turn doom the transformation to success in order to regain equity value."
Can private debt close the financing gap?
As more and more businesses find it increasingly difficult to either raise further equity or borrow more money from banks, our analysis explores the benefits and potential risks of drawing on private debt as an alternative financing source.
Explaining how private debt works, the report traces the continuous rise of this source of funding in recent years and examines the different segments that are of greatest relevance to companies looking to transform themselves. It discusses cost issues and how private debt ranks in the wider credit pecking order. While more than enough funding seems to be there to cover many businesses’ transformational needs, a note of caution also underscores the unique risks and pressures – above all the need to make transformation a success, in order to secure a repayment in due course.
In closing, for those companies keen to take the plunge, valuable practical advice is provided on the do’s and don’ts of applying for this form of transformation financing.
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