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A Dictionary of Finance
Quasi-equity, hybrids and mordern art
Quasi-equity and hybrids raise financing for different kinds of companies without diluting their equity holders. How does that work?
Quasi-equity is a contingent and participating loan, meaning that its profits are contingent on the success of the company and that it participates in the risk and the potential upside.
A corporate hybrid bond has characteristics of equity and debt, so that some of the bond can be accounted for as equity on the company’s balance sheet, keeping its credit ratings stable even as it raises more money in the debt.
Says Hristo Stoykov, head of growth capital and innovation finance at the European Investment Bank, “Quasi-equity is like modern art. You have to look from different angles and everybody sees a different thing.”
Hristo explains why a company would use quasi-equity, which he also calls “venture debt.” A company that has shown its product works and that people are interested in it needs to scale-up. But if it sells equity, it will dilute the ownership of its founders and it might find banks reluctant to lend because it lacks a credit history. Quasi-equity bears the same risk as equity without diluting the founders, and therefore pays off more like equity than traditional debt.
The EIB is one of the few players in the quasi-equity market alongside Silicon Valley Bank and Kreos Capital.
Pilar Solano joins Hristo on the podcast. She’s head of infrastructure new products and special transactions at the EIB. She points out that quasi-equity is a kind of hybrid. Her team uses a different form of hybrid to lend to big utilities. It’s called a corporate hybrid bond.
A corporate hybrid bond can be traded or privately placed. It has characteristics of equity and debt, so some of the bond can appear as equity on the company’s balance sheet. That’s useful to big utilities, because ratings agencies will allow them to raise the debt they need for their massive operational expenditures while keeping their ratings stable.
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