Navigating the Middle Market Lending Landscape

On the heels of another bank collapse, the middle market lending environment and its appetite for private equity deals are something to monitor for the rest of 2023 and into 2024. Here are some of the key issues that we’re watching –

1. Will there be any reduced access to financing? When banks and other lenders tighten their lending standards or reduce their exposure to the middle market, it can become more difficult for private equity firms to secure the financing they need to complete their transactions. We’ve seen some traditional lenders become more conservative in recent months. Will this become a broader market trend?
2. Impact of higher costs of financing: Higher interest rates and fees can reduce private equity firms’ returns on investment and make it more difficult to achieve their financial objectives. While there is still significant dry powder chasing deals, it seems like sellers may have to lower valuation expectations to get deals done in a higher rate environment. The math just doesn’t work the same for investors compared to 12-24 months ago.
3. Longer deal timelines: When financing is more difficult to secure, it can extend the timeline for completing a transaction. This can increase the risk of the deal falling through or of market conditions changing before the transaction is completed. This is a trend that started in Q4 2022 and has continued through the first four months of 2023.
4. Increased competition for financing: If banks and other lenders reduce their exposure to the middle market, it can create increased competition for the financing that is available. Quality deals with good investment theses will win out.

How we can help

CLA’s deal services team can help buyers and sellers with quality of earnings, tax due diligence, tax structuring, and other due diligence needs. Our industry lead portfolio services team work with portfolio companies to increase value and reduce risk.