is “sponsor coverage groups,” but non-sponsored companies do not
have the same options. This is going to change.
The growth of credit funds evolved from the growth of private
equity funds. Most markets, at some point, become efficient and the
current state of the lower middle market sponsor market — traditional,
old-economy companies that generate at least $5 million in EBITDA
— is efficient. Each sponsor now has a variety of options ranging from
aggressive bank financing to BDC, SBIC or a combination thereof.
Over the next 10 years, many predict there will be an explosion of
debt options for non-sponsor backed companies that generate similar
levels of EBITDA, which, for the purpose of this article, will be $10
million in EBITDA or less. Historically speaking, these companies
have been unable to obtain leverage or more sophisticated financing
packages because they lack the backing of institutional equity. The
majority of business owners do not have deep pockets.
Needs for Non-Bank Capital
Ted Koenig, CEO of Monroe Capital, says, “The biggest change will be
applying enterprise value lending to the family and entrepreneur-owned
businesses who have become more sophisticated in their needs.
“The lower middle market is the backbone of the U.S. economic
engine. These businesses need a non-bank capital provider that
can provide customized solutions,” Koenig adds. “Monroe has been
preparing for this shift to increase lending to non-private equity
backed companies by designing and employing a decentralized
sourcing strategy with multiple office[s] set up in regions. This strategy
is designed to enable Monroe executives to build direct relationships
with prospective borrowers.”
The market opportunity is simple — too many debt funds are
sitting on capital with nowhere to deploy it. The banks still control this
market, and capital providers will go after this market share. It will not
come without risk or mistakes, but non-bank lenders will have a bigger
opportunity to provide capital to thousands of companies that still rely
upon bank financing.
Hybrid Lending Models
Firms like The Credit Junction are leading the initiative on the lower
end of non-sponsor backed companies by providing a hybrid lending
model that combines the best of C&I loans with ABL, while delivering
more availability through a combination of tech-enabled solutions, old
fashioned underwriting and tactile account management. Clients also
get to control their own cash, which is a major change from the ABL
market. The end result is more availability and flexibility than a traditional ABL in return for a higher cash coupon.
“As banks and traditional lenders continue to move upmarket and
focus on larger deal sizes, a void has formed in the high-end small
business/low-end middle market C&I space,” says Michael Finkelstein,
CEO and founder of The Credit Junction. “Many of the companies we
According to the Small Business Investment Company
(SBIC), there are more than 300 SBIC licensees with
capital commitments totaling upwards of $20 billion.
This capital is primarily earmarked for private equity
backed companies in need of debt. Assuming an average
loan size of $10 million, this is enough capital for more
than 5,000 deals per year.
Right now, roughly 1,000 lower middle market deals
are announced each year, and the banks still control
this market. This means there is a congestion of capital
meant to follow private equity, but it can’t.
Lower Middle Market PE Activity
The past 15 years have brought about tremendous
change in terms of debt alternatives for sponsor-backed
companies in the lower middle market (see chart on the
next page). What used to be a very conservative lending
market with limited lending options has been revolutionized and transformed. The proliferation of BDCs, SBICs
and family office or private capital credit funds has created
a hyper-efficient market which has generated tremendous
liquidity. It also has generated extraordinary leverage and
a lot of risk — and this is just from the banks! There are
presently not enough sponsor-owned companies to go
around, and only so many sponsor-to-sponsor deals or
roll-ups can be done in the lower middle market.
Private equity firms have never had more options
and capital providers when it comes to debt financing
in the lower middle market.
Family or entrepreneur-owned businesses, on the
other hand, do not have near the amount of non-bank
lenders and products available to them. The flavor of
the month at banks and non-bank capital providers
The Changing Landscape of Non-Sponsor Finance
BY CHARLIE PERER
With too much capital chasing too few transactions, the middle market is ripe for change. Charlie Perer
predicts an explosion of debt options for non-sponsor backed companies over the next 10 years. He notes
that as non-banker lenders offer customers more service and flexibility, banks will respond by consolidating.
Head of Originations,
Super G Capital
What used to be a very conservative lending market
with limited lending options has been revolutionized and
transformed. The proliferation of BDCs, SBICs and family office
or private capital credit funds has created a hyper-efficient
market which has generated tremendous liquidity.