The Growth Drivers Of The Private Debt Industry

The private debt industry encompasses a variety of financing sources including acquisition financiers and growth capital providers. Historically, this industry has been a secondary source of capital for companies who historically relied on banks and the high yield market for their acquisition financing and scale up capital needs. Due to consolidation and increasing regulation, Banks have developed rigid approaches to lending that are a bit insensitive to market needs, particularly in the lower end of the middle market.

In the old days, regional bankers had more autonomy and were able to champion a deal they felt strongly about through their approval process, despite it not perfectly fitting the institutional criteria. Bankers today are more likely to be deal intake officers, with little credit influence, who hand the deal off to a completely different team in a completely different office within the bank. The bigger the bank, the harder it is for them to focus on smaller loans (< $15 million), which usually results in their vacating lower middle market sized deals to the SBA. These process, deal size and organizational limitations combine to make big banks an inhospitable place for middle market companies seeking acquisition financing.

Additionally, big banks usually see greater risk in smaller deals, resulting in their use of asset-based lending structures, which are of little use to high growth, asset light companies seeking cash flow acquisition financing. The confluence of these factors has resulted in the ascendency of the private debt industry. Private debt lenders have grown to become the preferred source of acquisition financing capital for middle market deals due to their specialization and approach.

Private debt lenders are advantaged by lighter regulation allowing them to be more creative and flexible. They also think more like business people, which makes their approach more relatable to the borrower. Even though their cost of capital and rates are higher than banks, private debt lenders offer high value acquisition financing structures which more than offsets the higher pricing.