Athyrium - What Is Structured Capital?

What is Structured Capital?

In contrast to a traditional equity investment, a structured investment is an investment with both debt and equity-like features. Part or all of the return is contractual in nature and usually includes 'downside' protection for the investor. Examples of structured investments include: term loans with warrants, convertible debt, preferred stock with dividends, royalties, and hybrids or combinations of these instruments.

Structured investments are usually primary transactions and provide fresh capital to a company.

Generally, structured investments have a higher cost of capital than traditional bank debt or inventory/receivable financing, but with signicantly lower dilution than a pure equity issuance.

We are willing to accept a lower target rate of return as a result of the protections that the structure provides us, which may include ranking senior in the capital structure, receiving coupon or dividend payments, or other protective provisions.

When is Structured Capital an appropriate financing strategy?

We believe that structured financings are a very appropriate financing strategy for many life sciences companies and can be paired with traditional public or private equity and traditional bank financing in order to create an appropriate capital structure to maximize shareholder value.

When considering structured financing, we think it is important to match the longer term funding needs of the business with the payment schedule (both interest and principal). As such, we think structured financings are a particularly good fit for companies that have a revenue base but desire capital to fund research and development, an acquisition, or to embark on more aggressive expansion requiring investment in sales or manufacturing infrastructure.

Structured financings tend to work well when a company needs access to capital for at least 18 months in order to achieve its longer term globals. It is not a good fit for short term financing needs (bridge financings).

Structured financings tend to be a poor fit with early stage research and development companies because it is difficult for such enterprises to afford a contractual rate of return and a balloon payment.

How does Athyrium's approach differ from a Venture Loan?

Athyrium's structured approach is very different from a traditional venture loan.

First, each of our deals is custom negotiated and not based on a template. Since many of our partner companies desire flexibility, our investments tend to be much less restrictive from a covenant point of view. This does increase the risk of the investment and is one reason the pricing is typically higher than a venture loan. We think this increased flexibility is generally worth it.

Second, Athyrium is a long term investor and is capable of providing long duration financing for a company or project. Venture loans typically require meaningful principal repayment starting 12 to 18 months after funding. Athyrium's structures frequently include a 'balloon' payment at maturity, allowing a company to make greater use of the capital over the term of the loan. We think companies should analyze the true cost of a venture loan rather than looking solely at the headline coupon.

What else should a company consider with regard to a Structured Financing?

We believe there a number of additional things that should be considered:

  • Alignment of interest - we believe it is important to align the interests of a structured capital provider with the shareholders of a company as much as possible; frequently we will do this through the use of warrants, direct participation in the equity, or some other way to link our interests
  • Behavior when something goes wrong - frequently we find that companies only consider positive cases when evaluating alternatives; we believe it is important to evaluate less desirable outcomes as well and to consider the philosophy of the capital provider; we think past behavior and reputation help to distinguish us in this regard
  • Sustainability of capital provider - structured investments are long term in their nature; we believe that a company needs to be able to know who they will be working with during this time; we believe that companies should prefer firms that have a long track record of providing capital, low team turnover, and are investing out of dedicated, committed funds
  • Scalability of capital provider - a company's needs change over time; we think it is preferable to work with a firm that can scale with your needs; we generally invest $25m to $150m per transaction; while larger transactions are possible, we find that, most of the time, traditional bank debt becomes more appropriate
  • Knowledge of capital provider - life sciences is a very specialized sector; we think companies should prefer partners who understand their business; such a partner is likely to be thoughtful if things go wrong and add value in good times