Structural concessions are made when the exit feels theoretical. At a seven-year hold, it stops being theoretical rather sooner than anyone planned.
Financing decisions at portfolio companies are made under a particular kind of time distortion. The transaction in front of you is immediate and concrete. The exit is a slide in a fund model. So when a lender offers a rate concession in exchange for cross-collateralization across entities, or a covenant tied to platform-level leverage, or a consent right on transfer, the trade looks obviously favorable. The savings are real and countable. The cost is hypothetical and years away.
Then the hold extends from five years to eight, and the hypothetical arrives ahead of schedule.
Nobody has ever walked away from a deal over an equipment facility. They just price it, and the pricing comes out of your proceeds.
The mechanics are unglamorous, which is precisely why they get overlooked at origination.
An equipment facility at one operating entity secured against assets at two others being sold in the same platform. Solvable — in weeks, with the incumbent lender holding leverage in a process where they have no economic stake in the outcome.
A lender who has been paid on time for six years now has standing in the sale, a view about the buyer, and an opportunity to renegotiate at the least convenient moment available.
Metrics that will be breached at close by the buyer’s capital structure — requiring a payoff that was not modeled, from proceeds that were.
None of these is fatal. All of them consume time, legal fees, and negotiating capital in a process where the sponsor’s leverage decays with every week the process stays open. And each becomes a line item that the buyer, entirely reasonably, prices.
What makes this a structural problem rather than a series of individual missteps is that these terms are usually inherited rather than chosen. A platform acquires an add-on, and the add-on arrives with an equipment facility from its founder-era community bank, complete with a personal guarantee structure that has been released but a consent provision that has not. Nobody reads it closely at acquisition because it is a small facility on a small entity. Seven years later it is sitting in the data room.
Multiply that across four or five add-ons and the platform being sold has a debt schedule assembled from the accumulated preferences of several different lenders, none of whom were thinking about this exit and several of whom were underwriting a different company entirely.
The right response is not to refuse every structural term. Some are perfectly reasonable and appropriately priced. The right response is to evaluate them against the actual hold period rather than the modeled one.
The implied capital cycle for buyouts now runs near seven years — two to three years past the assumption most portfolio facilities were underwritten against. The remote term is considerably closer than it looked.
The industry has now spent four consecutive years discovering this the hard way, with distributions stuck below 15 percent of NAV and roughly 32,000 companies still unsold.
The practical version of this is a diligence exercise most funds have never run: pull the equipment facilities across the portfolio and identify which ones carry cross-collateralization, consent rights, or platform-level covenants. It takes an afternoon. Most sponsors are surprised by what they find, and the ones who are not surprised are usually the ones who have already been through a process complicated by exactly this.
There is a broader point underneath the mechanics. Covenant-free structures with clean transferability typically cost slightly more in nominal rate. That premium is visible, quantifiable, and gets scrutinized in every financing decision. The cost of the alternative is invisible until a process opens, at which point it is measured in weeks of delay, legal spend, and retrade.
One of those numbers appears on a term sheet. The other appears in the proceeds. The industry has been optimizing the wrong one for about a decade.
First National Capital Corporation structures portfolio company equipment capital without covenants, cross-collateralization, or consent complications — built to be invisible in a data room. More than $4.5 billion funded.