Private equity investors have found it increasingly difficult to obtain financing for transactions over the last several months. The lessening availability of credit has contributed to the overall slowdown in middle-market deal volume. (See related chart). Many factors are in play. Traditional banks continue to face regulatory scrutiny about how much leverage they should supply to private equity transactions, which has caused them to shy away from lending to PE-backed deals. Capital constraints and shareholder activism are putting pressure on publicly traded business development companies, or BDCs. And collateralized loan obligation, or CLO, issuances are decreasing because of risk retention regulations.
While the climate is challenging for buyers trying to close deals, it’s fair weather for some non-traditional lenders. “We have seen a significant evolution in the credit landscape over the last three years,” says Seth Alvord, managing partner of Balance Point Capital, an alternative bank lender. “From mid-2012 to mid-2013, we didn’t do a deal. Aggressive underwriting led by increased BDC capital created considerable competition and, in many cases, unbalanced risk-return equations. This has changed significantly over the last year. The reality is that a material number of capital providers have pulled back from the market due to regulation or other developments. This dislocation represents a compelling opportunity for us.”