Leverage remains a huge contributor to getting deals done and producing attractive investment returns. And private equity firms are getting better and better at analyzing given the market data made available by firms like Sutton Place Strategies, who recently released their Q2 Mezzanine Market Perspective. In addition to highlighting several notable transactions, the report found that:
- The percentage of sponsor deals with mezzanine financing remained somewhat consistent at 6.5% in Q1, compared to 5.8% in Q4;
- Sponsor add-ons with mezzanine increased by 16.7% from Q4;
- Of the 75 closed mezzanine transactions in Q1, 27.6% were sponsor-backed add-ons, and 36.8% were sponsor buyouts; and
- The Services industry was the most active in Q1’19, followed by IT and Industrials.
In 2012, around the same time that mezzanine transactions began to slow, another interesting trend emerged: private equity professionals were appointed Heads and VPs of business development and origination in an effort to better “manage” relationships with investment bankers, advisors, and other traditional deal sources. Fast forward to now, we’re observing these same firms investing heavily in capital markets experts and in the technology needed to manage better relationships with lenders. Given the aforementioned need for lenders to make both add-on and buyout deals close, all we can say is: “it’s about time!”
It seems that the most effective private equity firms are now tracking and evaluating lenders better than ever – first and foremost by syncing every meeting, phone call, and email that they exchange with lenders to their team’s centralized technology platform. Relationship managers and coverage professionals are enhancing private equity lender profiles with aggregated data on deal terms, conditions, timelines, and even anecdotal information. This works to private equity firms’ advantage because it gives them better leverage in negotiations, a relationship to lean on, and a more targeted list of lenders to approach for any given deal. This, in turn, saves the private equity firm time and resources.
For some private equity firms that do not currently have a tried-and-true lender profiling strategy, setting one up may seem daunting. With the right technology, however, these firms can import deal data without manual effort through smart syncs between their technology platform and their devices. Firms can also pepper in data from third-party sources like Sutton Place Strategies for additional market context.
Once all the data is aggregated in one place, reporting on and visualizing that data is much easier and more comprehensive. For example, if a private equity firm is moving a pet products deal down the funnel, they can search and query their profiles to find every lender who has provided a financing proposal and terms in the consumer products industry in a certain EBITDA range over the last three years. Firms are using this type of information to identify private equity lenders they want to approach with any given deal, and throughout negotiations, these teams have the data they need at the ready.
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