More business development companies, or BDCs, have arrived in the dealmaking space, and with even more expected to form, competition between lenders for deals is likely to remain heated. In 2010, there were 24 BDCs. Now, there are more than 50, says Brett Palmer, president of the Small Business Investor Alliance (SBIA), a group of private equity funds, BDCs and other organizations.
SBIA members provide capital to small and medium-sized businesses.
BDCs, which act largely as lenders but also take equity stakes on occasion, have been occupying a space evacuated by banks as regulations have been ratcheted up, making it more difficult for the banks to compete in the middle market, especially the lower middle market.
"One of the reasons the BDC market has grown so much is what's happened in the banking market - they can't do the kind of lending that we do anymore," says Aaron Peck, a managing director at Chicago-based Monroe Capital. Monroe operates several lending arms, including Monroe Capital Corp. (Nasdaq: MRCC), a BDC.
On the low end, the returns BDC lenders can expect are about Libor plus 6 percent. Returns on the higher end, for riskier deals, are around Libor plus 13 percent, according to Peck.
The groups are aggressive when it comes to winning deals, especially in the current environment where most lenders are desperately trying to put money to work as they search for yield.
As more BDCs remain active in the middle market, borrowers should be aware that if they make a deal with a BDC for a loan, information about that loan will be available in the public domain, warned panelists at AM&AA's Summer Conference in Chicago in July.
Peck was joined by Peter Fidler, managing director of OFS Management and David Magdol, senior managing director of Main Street Capital Corp. (NYSE: MAIN) on the panel, while Palmer acted as moderator.
BDCs, because they are publicly traded, have the ability to quickly raise capital and start working on deals. That is one reason why Palmer says he expects the number of BDCs to continue to increase.
"The question is, are all the BDCs competing in the lower middle market experienced enough to do a good job for investors? The next cycle is when you'll see," says Peck. "I'd be careful of folks that are trying to get into the lower middle market because they're looking for yield. There's a very different underwriting process."