Seems the best way to get a deal done these days is to Do It Yourself. And by “It,” I mean the financing. Instead of relying on lenders or co-investors, firms are “in-sourcing” their deal finance. What better way to avoid dreaded contingencies, which these days, is a four letter word to the ears of sellers.
Just look at the recent fundraisings of Sterling Partners and Insight Equity. Both firms raised side funds (one a co-invest, one a mezzanine) for the sole purpose of financing their own deals. It has the same flavor as the attractive one-stop shop lending we’ve seen from the likes of American Capital, and GE and Allied’s Unitranche Fund.
We even saw Bain Capital and Blackstone Group and NBC go DIY in their buyout of The Weather Channel, which used financing from subsidiaries of the acquiring group. Bain’s Sankaty Advisors, Blackstone’s GSO, and NBC’s GE Commercial Finance filled in around 50% of the deal’s financing (the other half being equity).
So what does this mean for the leveraged lenders? You know, the ones who can’t stop proclaiming that they’re “still open for business!” Of course those people assured me they had nothing to worry about, but lender admitted, “We’ve lost a few deals to unitranche and PE firms with in-house lending.”
The only question I’m asking myself is, how do LPs feel about this practice? Possibly unhappy, since this means PE firms will cut into their potential co-investment deals. (Punished for being too slow? ) Now if they want a piece of the co-investment action, they have to invest in a fund, and pay fees for it… On the mezzanine side it’s probably not an issue as long as the firm does a market check to fairly price the debt.