Private Debt

CHAPTER 21The Borrower's Perspective

US BORROWERS

A continuing concern among investors in direct loans is whether opportunities will continue to exist in the future if the tight bank regulations put in place after the global financial crisis (GFC) are relaxed and commercial banks try to regain market share. With their lower cost of capital and the importance of financing costs to leveraged buyout borrowers, a rewind scenario is certainly plausible. This chapter provides the results of a survey conducted in 2017 of US middle market private equity sponsors on their decision process as to whether to use bank or nonbank financing. The purpose is to see if there are factors other than price that influence what lender to use.

A telephone survey of private equity firms was conducted to better understand the growth in nonbank lending in the private equity (sponsored) market. Private equity general partners (sponsors) shared that increased bank regulation, including capital requirements and limits on types of lending, has curtailed some bank lending. Sponsors cite the flexibility of nonbank lenders to structure creative deals, their ability to take on larger portions of a loan (both senior and junior), and the speed at which they can close as attractive reasons for moving business to nonbank lenders and away from traditional banks. Despite these trends, the most important consideration continues to be the relationship between the sponsor and lender, regardless of whether it is a bank ...