The recent economic downturn has been financially challenging for many businesses. Existing credit lines have been reduced, new loans from commercial lenders are more difficult to obtain, and accessing the public capital markets is likely not an option. So in this difficult market climate, where does a middle-market company turn for financing? The answer may be mezzanine capital.
The current recession in the U.S. has created a range of opportunities and difficulties for most mid-market companies. While some have tightened their belts as taught as possible to weather the downturn others are using stronger positions to their advantage to take market share or complete acquisitions. In both of these cases the highly coveted and valued resource today called “capital” is needed to successfully execute either strategy.
While the current economic environment and financial market meltdown have most business owners focused on conserving cash, controlling/reducing headcount and holding on for dear life, most of the wealthiest individuals in the world (including Mr. Buffett) will likely tell you that it is in these uncertain times that fortunes are made. Our belief is that this is true for distribution and industrial businesses that have the capital and courage to pursue strategic acquisitions in 2009. Valuations have meaningfully decreased and most of the attractive factors of the distribution marketplace remain – it is a large, diversified and growing market with considerable consolidation potential. A similar situation presented itself after the 2001/2002 slowdown and many distributors benefited handsomely from well-timed, highly strategic acquisitions.
In the world of finance, money is more than a mere measurement of wealth – it’s almost as revered as a religion. Based on the attendance at this year’s ACG (Association of Capital Growth) National Conference, this annual gathering of the financial faithful may soon be known as the “mecca of finance.” What began three years ago with fewer than 500 attendees has exploded into an enormous event attracting nearly 2,000 finance professionals, no small feat since each attendee paid a substantial registration fee.
As private equity transactions increase, the need for junior capital (second lien loans and mezzanine debt) has risen exponentially. According to Standard & Poor’s, the average middle market deal for the second quarter of 2006 ($50 MM in EBTIDA or less) was funded using 40% equity, 40% senior debt and 20% junior capital. The recent historically low interest rates made second lien financing attractive in larger deals with greater collateral. Therefore, the need for traditional mezzanine financing was reduced and was primarily used to bridge the gap between the second lien and the equity.
Largest Transactions Closed