"Westham Capital's unique strength is the longstanding and quality relationships that it maintains throughout the private equity industry."

Allen Rogers
Ewing Capital

Capital Primer

Theme

"Paying interest and having an equity partner can be a good thing."

Overview

When owners require debt to finance a business but already use senior debt, a second level of debt can be applied that will "sit behind" the senior capital. Because it is junior to the senior debt (and therefore has higher payback risk), it has a higher interest rate and, often, can include warrants that convert into nominal equity ownership.

Definitions

The business equivalent of a second mortgage, sub-debt is debt that is either unsecured or that has a lower priority than that of another debt (e.g., senior debt) claim on the same asset or property; also called junior debt or junior capital. Some senior lenders may consider sub-debt as equity in calculating loan covenant ratios since it sits behind their interest in the capital structure.

Business Lifecycle Stage


In addition to established, positively cash flowing companies, those that are at or close to breakeven (i.e., growth stage) are also appropriate for subordinated debt.

When Appropriate:

  • The company's assets are fully collateralized (or it has little in tangible assets) and it is consequently unable to borrow additional senior debt.
  • The current owners wish to keep as much ownership in the business as possible (i.e., not be diluted) and therefore do not want to align themselves with traditional equity investors who might require a change of control.

How Westham Capital Partners Can Help

Westham Capital Partners, based in Richmond, VA, serves as a co-investor and strategic partner to private investment group-s (Partner Funds) who desire concentrated investment opportunity development throughout most of the United States and Canada. These funds retain Westham to provide them with a dedicated, more efficient business development effort targeted towards intermediaries, business brokers, attorneys, accountants and other persons of influence. Westham and its Partner Funds share an interest in buyout, MBO, recap, growth capital, subordinated debt, senior debt and distressed investment opportunities.

Next Step

For additional information about our interests in this and other investment areas—or to discuss your capital needs—please Contact WCP or call 804.282.0785. We welcome you to invite your counsel or other advisors to participate as well.

Subordinated Debt Partnership