Can you briefly give your view of what’s going on in the acquisition financing Market
Sure there’s a lot going on Jane uh there’s a lot of new lenders there’s tremendous levels of capital that have poured into the private debt industry they say that they’re all looking for founder owned companies or independent sponsored deals but there’s a bit of a disconnect between what they’re saying and what they’re actually doing in the market uh because not all of these debt funds have the ability to execute a loan with a Founder owned company and despite a lot of the happy rhetoric that they want to put Capital out behind founder owned businesses it really comes down to when they don’t know how to do it they really end up wasting people’s time and it becomes almost a form of discrimination against these types of companies because they can’t close so more lenders but they’re not hitting the mark
Why do you think that is?
I think because a lot of them don’t have experience directly interfacing with these types of companies on an operating level they treat lending to founder owned companies almost like asset allocation and they don’t treat it as if it’s a people and a relationship centered Arrangement like you really have to get to know the management team and the owner of a Founder owned company in order to have a comfort level to make a loan and I think it’s very different fundamentally than making a loan to a private Equity back business because in those deals the private Equity Firm has everything buttoned up it has everything tight and so you’re just putting money into a very efficient company that has all its systems and all its practices down but with the founder Ro company there’s always some things that have to be improved the lenders need to understand that and I think a lot of it comes down to the inability to connect with them on an interpersonal basis they lack the soft skills to build a relationship and I think they just ultimately want to have their cake and eat it too they want the higher returns of lending to a Founder own company but they don’t but they want the risk the lower risk of lending to a private Equity back company so it’s a bit of a dichotomy.
How do you identify trustworthy acquisition financing lenders?
I think you have to look at the types of companies that they’ve made loans to in the past I mean if they’re saying that they want to make loans to found their own companies but 80% of their loans are to private Equity back businesses then they’re really not doing a very good job getting Capital out to found their own companies so you have to look in their portfolios you also have to see if there’s any shift in their interest from the front end of when they start engaging with the company sort of in the middle of the process and towards the end of the process are they talking more like a lender that can do this type of a loan but are they backing away from that language once they get into due diligence or once they get to closing and then you also have to make sure that they’re comfortable with their stated returns which is to say that if somebody says that they’re comfortable in the low teens as a stated return but then in the middle of the deal they start talking about well we need to be in the High Teens or we need to be in the low 20s then that’s a red flag so I think looking at their portfolio and making sure that there aren’t these shifts once you get going with the deal are proven things to do.