As a decision-maker in a mid-market private equity firm, you understand that structuring the right private credit deal is essential to achieving the growth and financial returns your portfolio companies need.
One of the most important—and sometimes overlooked—decisions in this process is determining the right number of lenders to invite to the deal. Flexibility, speed and relationships are critical in ensuring that you complete your deals and raise your debt financing in a timely and efficient manner.
The balance between too few lenders, which may limit borrowing flexibility and the ability to raise incremental financing, and too many lenders, which can introduce inefficiencies and complexity, is particularly nuanced for mid-market transactions.
In this paper we will explore the optimal number of lenders to invite to your deal, enabling you to make informed decisions.
Background
Financing mid-market companies is a competitive landscape where relationships and scale can significantly impact the ability to secure debt.
Unlike larger private equity firms, you may be operating without a dedicated capital markets team. Your role already requires you to navigate the intricacies of deal making and portfolio management. You also need to layer in capital markets and debt financing expertise.
This is particularly tough in the current dealmaking environment – sourcing and closing debt finance is an additional burden that falls directly on your shoulders.
Too few lenders
A competitive bidding process always creates a little tension – and in this case that can translate into lower borrowing costs or more favorable terms.
Fewer parties in the process means that you may be more likely to accept restrictions that may later impact your portfolio company.
There is no denying that it is quicker and easier to reach out to the same relatively small group of lenders who regularly finance your deals. They know your terms, the NDA is already on file and they have an incentive to get around the table if important conversations need to happen.
But could this inadvertently lead to a concentration of lenders in your portfolio?. If those lenders face liquidity issues or change their strategy, you may find that future credit lines are impacted.
If you have buy-and-build as part of your investment strategy, a more expansive group of lenders who have significant dry-powder and are willing to provide incremental financing will be a key factor in determining how many parties to involve in a particular debt raising process.
One last consideration is the level of flexibility required in your debt documentation in order to realize your investment thesis. While your small group of incumbent lenders may suit you existing debt profiles, can they adapt to meet new industries, geographies or structures?
Too many lenders
Potentially lower costs and more flexibility definitely sounds like a desirable outcome. So why not just open up your deal process to multiple lenders?
Time and workload.
Quite often it boils down to these two factors. Your deal is time-sensitive, markets can move and you are already managing multiple processes and stakeholders to get the deal closed.
The more lenders you involve, the more questions are likely to be raised during the due diligence process – particularly if these are new lenders that you haven’t worked with before.
Coordinating with multiple lenders can lead to excessive back-and-forth, with frequent updates, negotiations, and clarifications needed. This can distract from other important aspects of the deal and delay decision-making, even though you only end up using one lender.
This could also have a very direct financial cost in the form of higher advisory or legal fees.
With any information that leaks being highly damaging, you also have to consider how widely you want to open the pool of interested parties. Quite simply the more people involved, the higher the risk of information leakage – however inadvertent.
It is also worth remembering that relationships still play a key role in business. Opening up a new deal to a large number of lenders, but then eliminating the vast majority of the parties late into the process is likely to be damaging to the overall relationship, particularly if lenders perform significant work.
Lastly, there are some highly undesirable outcomes which may come as a result of opening the process up to too many parties such as delays or even information leakage. Keeping the process focused may help to reduce some of these risks.
Too few lenders | Too many lenders |
Lack of competition could impact debt cost and deal structure / flexibility | Time and increased workload |
Lender concentration risk and limited capacity for incremental borrowing | More complex lender relationships |
Missed opportunities for deal customization or future funding | Risk of information leakage |
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