It is common in a private equity investment for the fund to extend a bridging loan to the target company before making the investment. This is because the target company may often be experiencing a funding shortfall and the investment will usually take some time to complete.
Bridging loans, also known as quasi-equity investments, take two forms. The first is a short-term loan that the target company will usually repay to the fund after the investment concludes. The second is a convertible debt, namely a loan that can be converted into company equity when the fund invests in the target company.
There are two aspects to the legal relationship involved in a bridging loan: the ordinary claim-debt relationship, and the debt to equity relationship between the private equity fund and the target.
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Eric He Xin is an associate of PacGate Law Group.
