Securing Acquisition Financing with a Data-Driven Process
Over 70% of commercial banks and non-bank lenders recently indicated that M&A activity drove lending demand in 4Q20, according to data from the Federal Reserve’s Senior Loan Officer quarterly survey and Cerebro Capital’s quarterly Non-Bank Lending Survey. M&A activity slowed rapidly in the second and third quarters of 2020, especially among PE firms and independent sponsors, but saw promising signs of improvement in 4Q20. Creditworthy companies took advantage of tremendous buying opportunities at attractive valuations to build their portfolio.
However, due to changing lending standards and lower risk tolerance from many commercial banks, sponsors attempting to secure acquisition financing often had to search outside of their existing lender relationships. Capitalizing on new data-driven lending platforms like Cerebro Capital, sponsors leveraged current market data from hundreds of lending institutions in a single RFP process to target lenders that were open to new acquisition deals.
Instead of relying on existing lenders, some sponsors turned to technology platforms to manage their debt placements for acquisitions for the following reasons:
Seeking clarity on current financing terms from commercial bank and non-bank lenders
In Q320, 40% of both bank and non-bank lenders indicated that they had tightened their lending standards, according to the Fed’s Senior Loan Officer survey and Cerebro’s Non-Bank Lending Survey. By 4Q20, less than 20% of lenders shared that standards were continuing to tighten. With credit standards and lending terms changing rapidly as economic and business outlooks improved after the vaccine was announced, it became clear that keeping up to date on available loan terms was becoming increasingly cumbersome to manage. Efficiently identifying lenders that were offering the best terms for a specific deal was critical to taking advantage of attractive acquisition targets ahead of other sponsors.
Outsourcing the debt process while focusing internal resources on targets and valuations
PE firms and independent sponsors essentially paused activity during the beginning of the pandemic and weren’t willing to deploy capital at the rate they might normally have due to an inability to assess investment risk. Most funded sponsors have a 3 year time horizon for deploying capital. As such, the delay in making investments put additional pressure on those firms to deploy larger amounts of capital in a compressed timeline. This led to significant pent up demand from these firms for viable growth-oriented businesses and internal resource constraints. Sponsors that leveraged outsourced debt processes were able to move faster towards a deal close because they could focus their internal bandwidth on target evaluations.
PE firms and other sponsors that plan to increase their M&A activity this year should expect a continued challenged credit environment with gradual improvement as the lockdowns begin to relax. Looking ahead, 40% of non-bank lenders in Cerebro’s survey indicated that they anticipate easing lending standards this year, while the vast majority of bank lenders participating in the Fed’s survey expect standards to remain the same.
Evaluating debt financing options is time consuming, especially when existing lenders may not be able to support new debt deals due to increased credit standards and lower risk exposure. Working with an outsourced debt advisor or lending platform like Cerebro Capital can help sponsors evaluate all financing options across hundreds of different lenders in one efficient process, and secure the most attractive terms for acquisition financing.
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The world of middle-market lending has changed. Before COVID-19, traditional lenders showed flexibility as they worked to expand their books of business.
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