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Desperate direct lenders kept in the dark as private equity firms call shots
by Lisa Fu
The intensifying fight for sparse private credit opportunities is enabling M&A bankers to keep lenders in the dark, according to market sources. Under pressure from sell-side bankers, sponsors bidding on companies are said to be looping in direct lenders that will provide acquisition financing later in the auction process, often after indications of interest (IOIs).
Debt financing dynamics have swung in favour of borrowers because direct lenders, which are flush with dry powder, are competing against each other and the active broadly syndicated market. Borrowers are also helped by the fact that private credit firms face pressure from LPs to deploy capital despite there being few investment opportunities as M&A volumes remain depressed.
Private equity firms waiting to call on private credit relationships for debt financing is a long-term trend that seems to have accelerated in the past year or two, said Richard Harding, a managing director and head of the US private equity solutions group at investment bank Moelis.
The sell-side hopes that by restricting bidders from giving information to lenders, they can keep market chatter to a minimum when narrowing down the pool of bidders, he added. It is not uncommon for sellers to entirely restrict direct lender access until after non-binding initial bids are collected.
When exactly a lender is given information on the target company and brought into the M&A process varies, but it seems sponsors are waiting longer to make contact, said a direct lender investing in the core and upper middle market. Each process has its own rules, but waiting until after IOIs is more common now, they said.
Why run the risk of buyers going out and talking to a handful of lenders?
Richard Harding
Head of US private equity solutions group
Moelis
The push to keep lenders in the dark is deal-specific, said Chris Sheaffer, a partner at law firm Reed Smith. It is typical to prevent bidding sponsors from sharing target company details with co-investors until after IOIs, but over the past 12 months it seems more non-disclosure or confidentiality agreements are keeping direct lenders out of the picture. Depending on the agreement, bidders are only allowed to share information with advisors and lawyers during the early stages.
“[The trend] is accelerating because people are more cautious about [M&A],” Harding said. “I think that has to do with the market environment. Credit was the challenge in 2023, but today credit availability and pricing aren’t holding back transaction activity, it’s getting the equity lined up at the right price.”
When sellers worry about deals not closing, they seek to lessen market chatter as it gives them control over the narrative and positioning of the company, and whether it is a “storied credit” or a “solid growth story”, Harding said.
“Why run the risk of buyers going out and talking to a handful of lenders, some of whom may have a negative view on the sector or company?” Harding said. “You could go to a wider universe of lenders to optimise your financing source.”
Many sellers now ask bidders to use pre-selected debt financing reads when submitting initial bids, Harding said. The sellers identify potential financing sources — often direct lenders they like or the incumbent lenders — and ask for terms ahead of the sale process launching.
Over the past 12 months, alternative firms have begun using equity and debt to participate in deals through multi-strategy funds, and this could be another factor contributing to banks’ wish to restrict information, said Sheaffer.
The sell-side want to ensure all potential bidders participate from the equity side. They do not want sponsors to see the information and switch to bidding as a lender.
“You don’t want people talking to the credit team, which then causes the private equity team to decide they don’t need to be a buyer because they will get the investment through credit,” Sheaffer said.
