In Praise of Non-Sponsored Acquisition Financing Deals

Posted on: January 30th, 2024

acquisition-financing

The acquisition financing market contains a multitude of lenders arrayed by deal size and deal type. The largest segment is private equity sponsor-based finance where the lender advances acquisition financing in support of a private equity-led buy-out structure. This strategy is popular within private debt funds and many of them focus on this exclusively.

In this type of lending situation, the acquisition financing provider is treated as a commodity provider by the private equity firm, with little to differentiate them aside from dollars provided and price. Acquisition financing providers like private equity backed deals because the private equity funds have deep-pockets and can fund the company if it runs into trouble. This gives the PE-focused acquisition financing lender added protection to recover its principal in a downside case. The other, smaller segment of the acquisition financing market is direct lending which includes loans to founder-owned companies and independent, non-private equity fund buyers. These deals have no institutional private equity backing but are sponsored by the current owner or a successful businessperson with significant net worth. These deals tend to clear at lower prices and lack large dollar equity investments akin to private equity investing.

Often the owner or businessperson is already successful with a demonstrated record of business steps similar to the private equity playbook. They are independent and do not want or need an investor particularly one fond of dispensing cliched textbook lessons on how to build a business. These owners are not only experts in their field, but possess high level intelligence, often beyond the level of the private equity investor, on the best way to scale up. These owners and independent sponsors are rare breeds in the acquisition financing ecosystem and act as their own private equity funds. These non-sponsored deals usually have strong leadership, quality management and growth conviction making them great opportunities for acquisition financing lenders seeking to provide transformational capital.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.