Secure a seat at the negotiating table and earn higher returns
Arturs Cakars, Group Chief Corporate Affairs Officer at Wandoo Finance
Stocks, bonds, funds, crowdfunding, and real estate dominate conversations at investment conferences and in the business media. However, another type of investment receives much less attention: direct debt placements. This option is more accessible to investors than many may think.
A higher entry threshold, but investors can join forces
Direct debt is an agreement between a company and an individual investor or a group of investors. In its simplest form, the agreement sets out the loan amount, maturity, interest rate, and payment schedule. In larger, more complex transactions, the loan's overall structure becomes important. This may include covenants or financial conditions imposed on the company, reporting requirements, collateral, and the loan’s priority relative to other creditors.
The performance of a direct debt depends primarily on the borrower's financial health, not on sentiment or price movements in the broader capital markets. Investors assess the company much like a bank, focusing on expected cash flow, key risks, and the ability to make interest payments and repay principal at maturity. The business's potential valuation in five years is therefore less important than its financial strength throughout the loan term.
Another feature that distinguishes direct lending from capital market instruments is its higher entry threshold. Based on Wandoo’s practice, the minimum transaction amount is typically EUR 50,000. Other companies may set a lower threshold, while large companies may require minimum amounts in the millions of euros. However, the entire amount does not necessarily have to come from a single investor. Private investors often invest as a group (syndicate), allowing them to meet the requirements collectively.
Investors must also recognize that direct debt is less liquid. It cannot usually be freely sold or transferred to someone else. In most cases, investors must be prepared to hold to it until its contractual maturity while receiving regular interest payments in the meantime.
An opportunity to negotiate better terms
When purchasing instruments on public markets, investors accept the price and terms of the moment. Take bonds as an example. Their coupon rate, maturity, and payment schedule are fixed when they are issued. The market price and yield may change when the bonds are traded, but the contractual terms remain the same for every bondholder.
These terms also reflect the wider cost of raising money through a bond issue. In addition to paying the coupon, the issuer must cover expenses such as marketing, legal and financial advisers, lead arrangers, and other service providers. The issuer’s total financing cost is therefore higher than the coupon rate received by investors, leaving less room to offer even better returns.
Direct debt placements generally require fewer intermediaries and avoid many of the costs linked to a bond issue. As a result, the company can pay investors more. In some cases, returns can be even 2 to 3 percentage points higher than on bonds with a similar risk level. The interest rate is not the only point open to discussion, though. Investors may also negotiate other conditions, including repayment schedules, guarantees, etc. And they discuss these terms directly with the company’s management rather than simply accepting them from a prospectus published through a stock exchange, bank, or the issuer’s website.
Where can investors find these companies?
Unlike bonds or stocks, direct debt deals are rarely listed in one place, and some of the best are never advertised publicly. Because the market is built largely on relationships, investors need to know where to look and, more importantly, how to start the right conversation.
Industry conferences and business events are among the best places to begin. Companies attend these events to present themselves and find partners. Approaching a company in this setting is therefore both natural and practical. Think of it as a form of corporate Tinder: both sides are there because they are open to a match.
Company websites offer another useful starting point. Many publish financial statements, investor presentations, funding offers and contact details. Even when a company is not actively advertising a financing opportunity, its website can show whether it is expanding into new markets, launching products, making acquisitions or investing in growth. These developments may create a need for additional capital and give investors a reason to start a conversation.
Personal contacts remain one of the most effective routes. The Baltic business community is relatively small, and you can often reach the right person through your own network. A trusted introduction can help get the company’s attention more quickly than a cold email. Investor clubs and informal investment groups like Investoru klubs or Investor Toomas can also provide a perfect platform for finding these companies.
Available to many, if chosen with care
Businesses reach the capital markets at different stages, and some may never need to enter them. Later-stage start-ups and growing small and medium-sized companies often use direct debt when a public bond issue or an IPO is not yet practical or necessary. Entering the capital markets requires sufficient scale, visibility, and the resources to cover issuance costs. For many companies, private debt is therefore a more accessible and flexible way to finance growth. Meanwhile, for investors prepared to do the necessary research and accept lower liquidity, direct debt can offer not only an attractive return but also something public markets rarely provide: a genuine seat at the negotiating table.
Of course, every company must check whether an investor is suitable, including their risk tolerance, source of funds, and other relevant factors. These checks help protect investors from taking unreasonable risks while also protecting the company’s long-term interests.