Why might private equity firms opt for term loans over subordinated notes?

Private equity firms may opt for term loans over subordinated notes primarily because term loans offer greater flexibility, particularly with optional repayments. This flexibility can be very appealing to private equity firms, which often seek to manage their cash flows effectively as they invest in and grow companies.

When a private equity firm takes a term loan, it usually has the option to make additional repayments without incurring significant penalties or restrictions. This can allow them to pay down debt faster if cash flows improve, or adjust repayment schedules according to the financial performance of the portfolio company. The strategic use of this flexibility can help firms optimize their capital structure and manage risks more effectively.

While the other options present aspects related to term loans, they don't encapsulate the key reason for choosing term loans over subordinated notes. For example, choosing shorter repayment terms doesn’t necessarily address the flexibility aspect. Similarly, while term loans might have higher interest rates, that doesn’t inherently make them a better choice unless other factors align with a firm’s financial strategy. The greater flexibility offered by term loans is a compelling reason for private equity firms to prefer them in many situations.