For example, imagine you launched a manufacturing acquisition platform in 2006, and used leverage to fund the initial formation and acquisitions. Chances are that the debt terms were pretty loose, or at least much looser than you could get today. So when you go back to your banker to help finance a bolt-on acquisition, you get told: (A) You’re not going to be able to get the 2006 terms for the bolt-on, and (B) In order to get bolt-on financing, you’ll need to rework the original 2006 loan terms.
“Banks now want to reset any deal cut under the old rules, and will use any excuse to do that,” says Stuart Kohl, co-CEO of The Riverside Company (which does tons of bolt-ons). “And a desire to borrow additional capital is maybe the best excuse.”
All of this puts mid-market PE firms in a sticky wicket. On the one hand, valuations have come way down for potential adds-ons. On the other, it’s uncomfortable to price debt on the original deal, since that is likely larger than the add-on. The result, Kohl says, is “a dampening” of such activity.
So what to do? One option, of course, is to simply use equity. Another is to form a “sister company” rather than a formal bolt-on to the platform, with plans to merge when the debt markets loosen back up a bit.
The third option, of course, is to do nothing. And, judging by recent deal activity, that seems to be the path many firms are taking.