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Bridge equity refers to a period of short-term financing that is used to get an individual or company through a tight financial situation until long-term financing can be secured. In this way, the equity acts as a bridge between the current situation and the future eventuality. Private equity firms often use bridge equity as a way to complete a leveraged buyout of an existing company. Loans known as bridge loans, which are often issued by lenders expecting quick repayment at high interest rates, are another way for companies to receive short-term capital.
Many loans and similar financing arrangements are often set up to be realized over a long period of time. There are some cases, however, in which it is necessary for individuals or institutions to receive quick, up-front financing. These situations arise when the person or group in need of financing must receive the capital quickly to execute a certain deal or to escape a short-term debt obligation. Bridge equity is one way in which this financing can be arranged, allowing for those receiving the capital to satisfy their short-term needs and to eventually profit in the long term.
Private equity groups, which specialize in buying out existing companies and reversing their fortunes, often are in most need of bridge equity. For example, a private equity group might have a company targeted as a potential buyout opportunity. But they may lack the initial funds necessary to buy out the existing ownership.
At that point, a bank can be approached by the equity investors as a possible provider of bridge equity. If the bank agrees, it will provide the remaining equity to the private equity group to complete the buyout process. Once the agreement is reached, the bank can then look to sell the equity on to other investors. By providing the equity, the bank is taking on some of the risk associated with the equity, so it will make sure that terms of the agreement are favorable enough to offset that risk.
In certain cases, bridge loans can be used to provide bridge equity. These can be useful to those individuals in need of quick cash or even to companies who are expecting an infusion of funds in the future but need money to fund operations in the current time. The lenders who offer bridge loans often demand that the loans be paid back in a period of time much shorter than the average loan term, and they often charge high interest rates to account for the risk involved with these loans.