Lender Temperament And Acquisition Financing

Posted on: February 5th, 2022

acquisition-financing

Picking a lender is an important choice, a long-term commitment on both sides. Despite the importance of a quality acquisition financing lender to the success of a deal, these lenders are often regarded as somewhat interchangeable. Successful acquisition financing providers have been in the industry for many years and have been through many different types of loan performance scenarios.

They also have strong temperament which allows them to be a good long-term partner to their borrower. The more seasoned the team and the greater number of investments made, the smarter and more understanding they are as a partner. The top decile of acquisition financing providers has a finely honed understanding of the growth plan.

Acquisition Financing Philosophy

Often, this allows them to stretch and provide more funding, deeper in the capital structure, at lower prices for their borrower. This type of lending value proposition is a golden arbitrage opportunity for a company, enabling them to accelerate their growth with plentiful amounts of acquisition financing. Superior lender temperament is not easily discerned in the flurry of term sheet review in the heat of the deal process. It goes beyond the normal price comparison of term sheets and is one of the most important steps in the borrower’s decision. It requires careful listening and probing as to the acquisition financing philosophy of the fund.

It requires vetting the historical lending experiences, learning their prior successes and flops. It also requires assessment of the acquisition financing provider’s risk orientation. Are they well-grounded in the potential downside, such that they will act reasonably should a default occur? Are they imbued with uniformed enthusiasm about a deal that will cause them to act irrationally, if the deal goes south? Lender temperament should be carefully considered on the front end. Strong temperament makes a good lender, and a good lender is a great source for acquisition financing.

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.