What Independent Sponsors are looking for in their Acquisition Financing Lender

Posted on: April 7th, 2022

acquisition-financing

Acquisition financing is available across a wide variety of platforms ranging from banks, private debt funds and public debt funds. Each platform has a specific focus based on cost of funds and risk-return preference. Independent sponsors have made strong inroads in the middle market deal arena over the past 10 years.

Independent Sponsors and Acquisition Financing Lender

In our 32 years of experience catering to independent sponsors, we have learned a great deal about their lender selection criteria. They have a unique view of lenders, borne of their independent entrepreneurial streak, which many lenders are oblivious to. They do not make decisions like private equity funds do. Acquisition financing lenders that understand how they think are well positioned to take independent sponsor market share.

Here are top things independent sponsors look for in their acquisition financing lender.

Business mentality – lenders particularly big banks often speak in a technical financier language as well as bureaucratic jargon. Independent sponsors want a lender who speaks their language, who comes across as a businessperson, not a banker. They want a lender who has energy and enthusiasm about doing business with them, not a staid, low energy approach characteristic of so many lenders.
Quickness – independent sponsors are successful in part because they move quickly. They like to work with acquisition financing lenders who are quick studies and intuitively understand the deal. The best acquisition financing lenders run quick and highly transparent approval processes.
Humility – Independent sponsors tend to favor lenders with humility that have a low key, yet confident view of themselves. They do not like arrogant bankers who place outsized importance on their role in the transaction.
Entrepreneurial Approach – independent sponsors like lenders who are organizationally empowered to find reasons to do their deal, as opposed to finding reasons to pass on it. Acquisition financing lenders with flat decision-making processes with local level decisioning are favored by independent sponsors.
Relationship workability- independent sponsors are not just closing a transaction but are building a long-term relationship with their lender. They want to make sure they can operationally work with the lender and develop a relationship supportive of future scalability.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.