A Q&A with John Bowman, Managing Director and Co-Head of Crescent Direct Lending and Scott Carpenter, Managing Director and Co-Head of Crescent Direct Lending


The Crescent Direct Lending team has been involved in lower middle market financing since 2005. What changes have you seen over the past 10+ years in lending to private equity-backed companies?

Our strategy has remained consistent since we entered the market. We provide senior cash flow-based financing for our private equity clients. The CDL team has financed over 130 platform companies and 300 total transactions including add-ons representing over $4 billion in commitments to our private equity clients. We are industry generalists, but have significant experience in a number of industry verticals including healthcare, education, environmental services, food and consumer products and business services to name a few. While we have expanded our capital base during the past 10 years we remain primarily focused on the lower middle market, lending to companies with $5+ million of EBITDA. Many of the investment themes we saw 10 years ago remain relevant today, however, there is greater emphasis on add-on acquisitions to mitigate high valuation multiples paid for platform acquisitions. The high velocity of add-ons gives larger lenders such as CDL a significant competitive advantage over smaller credit platforms and new entrants with smaller capital bases.

How does this high level of add-on activity or buy and build strategies influence how a PE firm chooses its lending partners?

Post downturn, sponsors have continued the shift away from using banks as financing sources for a number of reasons. Today, given the significant competition to win platform acquisitions, sponsors increasingly focus on speed of execution and certainty to close, lender reputation and responsiveness as well as a lender’s familiarity with the relevant industry. Given the importance of add-ons in current PE fund vintages, there is a greater emphasis on a lender’s track record of financing add-ons, particularly on the lender’s balance sheet hold capabilities as part of initial credit facilities. During 2018 we have seen unfunded revolvers and delayed draw acquisition facilities reach up to 50% of total day one credit facilities, up from an average of 10-20% during the 2015-2017 time frame. This can result in smaller credits with less than $10 million of EBITDA issuing credit facilities of up to $75+ million. Only a few firms focusing on the lower middle market such as Crescent Direct Lending have this balance sheet capability.

What is CDL’s experience in financing add-on acquisitions for PE backed companies?

CDL’s current portfolio consists of 80+ borrowers with approximately $2.5 billion in total commitments outstanding. During the last 12 months we have financed over 30 add-on acquisitions for our portfolio clients representing 30% of total commitments during this period. By working closely with our clients we are able to support clients’ acquisition strategies, providing flexible solutions for their growth needs. While we have supported our clients’ add-on needs since 2005, today given the high valuations being paid for platform investments, the urgency to find attractive, accretive acquisitions is greater than ever. From our perspective, supporting our private equity clients’ acquisition strategies is also an efficient way for us to further invest in a borrower we know, an industry we already like and a management team and sponsor we have worked with before. While we acknowledge the risks inherent in financing businesses that are acquisitive, we work closely with our sponsors to understand their strategy and path to value creation. It is also not uncommon for our sponsors to make an initial investment in a portfolio company and then make significant further investments in the business outside of acquisitions to position the company for growth. This often includes investments in technology, C-Suite level management and sales and marketing. We are thoughtful in structuring our loan facilities consistent with these plans to allow our clients the flexibility to execute on their growth strategies.

What size companies are being considered for platform investments by private equity sponsors?

We support borrowers with $5+ million in EBITDA and certainly see a trend toward larger sponsors moving down market and acquiring sub $15 million EBITDA companies as their initial platform in a space if it’s deemed attractive for acquisitive growth. While many of these businesses require investment to position them to scale, we have been successful in identifying and supporting lending opportunities to small businesses that have leading market shares in niche markets, strong financial profiles and customer diversity. These are businesses with strong potential that will benefit from the resources of a private equity firm. We have supported many portfolio companies that have grown from lower middle market companies with $5-10+ million of EBITDA to middle market companies with $50- $100+ million in EBITDA at exit. Our sponsor clients appreciate Crescent’s desire and ability to grow with them over time.

Has Crescent’s commitment to smaller borrowers changed over time as your AUM has grown?

We have targeted the lower middle market since 2005 and that continues to be our focus. We have found that by supporting smaller initial borrowers, we benefit from the growth of these borrowers over time generally increasing our loan with these companies as they grow. Supporting the lower middle market is important to our sponsor clients and it’s also important to our LPs who value our role as one of the largest and most active lenders focused on the lower middle market today. Our borrowers often start with initial financing as small as $20-25 million and grow significantly over time. We have also been successful in providing staple-on financing to our clients when they sell their businesses, as we generally have a strong understanding of their business as the incumbent lender. One recent example of this involved a client portfolio company in the educational space where we provided staple-on financing and were fortunate to Agent a $200+ million credit facility for the acquirer, who was also an existing client of ours. Our knowledge of the business and relationship with both the selling sponsor and the acquiring sponsor allowed us to remain invested in the company and increase our role and investment as Agent for the new credit facility.

How are sponsors viewing senior/ mezzanine versus unitranche structures for their platform companies that have aggressive acquisitive strategies?

Clients’ views can differ on this topic, but we do see an increase in unitranche financing. In some cases a sponsor’s preferred capital structure may be credit specific or there may be a general preference for one structure over the other. Some like the ease of execution and certainty of unitranche financing, especially in current market conditions where sale processes are accelerated. Others, on the other hand, have confidence in their existing senior and mezzanine lender relationships and prefer to have both sources of capital for growth. Senior/ mezzanine structures also often allow for greater leverage and may have lower blended pricing when compared with unitranche financing. While certainty to close may imply a bias towards unitranche, current market liquidity in both the senior and mezzanine markets certainly mitigates this concern for the time being. Crescent Direct Lending is very active in both the senior and unitranche market and depending on the specific credit we generally offer both options to our private equity clients.

What is most important to a private equity firm when choosing a lender to support their buy and build strategy?

Ultimately balance sheet size, certainty and flexibility of debt capital helps drive private equity returns rather than the cost of that debt capital. Competitive pricing is important, but having a partner who can move quickly and be flexible is critical when executing a buy and build strategy. In the current high valuation environment, add- ons often represent a significant element of value creation as part of the sponsor’s investment thesis. In the end our leading position in the lower middle market is a testament to the longstanding partnerships we have built with both our private equity clients and also the management teams that have run those businesses.

About Crescent Capital

Formed in 2005, Crescent Direct Lending (CDL or Crescent) is a leading provider of Senior and Unitranche financing to private equity-backed U.S. lower middle market and middle market companies1. CDL is one of the most active lenders in the lower middle market, managing more than $5 billion of total capital and investing over $1.2 billion in loan commitments to date in 2018 for our clients’ platform and add-on investments. We have significant experience in a broad range of industries, targeting companies with $5 million to 35+ million of EBITDA. We have the ability to underwrite credit facilities of $200+ million. CDL is part of Crescent Capital Group LP, which is a leading asset manager in the below investment grade credit market with approximately $25 billion of assets under management, over 80 investment professionals. The firm was founded in 1991.

1. All historical references to Crescent’s direct lending team and track record prior to June 2012 are based on Crescent principals while at their previous investment firm, HighPoint Capital Management, LLC, from January 2005 – May 2012.

Contact Us

John Bowman | Office: 617-854-1501 | Email: [email protected]
Scott Carpenter | Office: 617-854-1502 | Email: [email protected]