Banks used to be a big force in the acquisition financing market. Many used to provide loans directly to their best customers. Nowadays, most banks participate in acquisition financing indirectly through funding private equity sponsored buy outs. In today’s banking market, a direct loan to a non-sponsored deal is a rarity due to the industry’s conservatism and regulatory oversight.
Cross Border acquisition financing activity has ramped up due to global realignment of supply chains. Grappling with tariffs, companies who export to the US are now investing in the US either through M&A or expansion.
There are a number of ways to solve the funding puzzle at closing in the world of acquisitions. Mezzanine debt has unique properties that give it puzzle funding superpowers compared to other forms of capital. Most deals try to stretch bank financing as far as they can, only for it to come up short due to collateral shortfalls. By the time the bank is done trimming their loan amount, an unfunded gap emerges.
Investors like their returns and keep their cards close to their vest when disclosing acquisition finance strategies. Equity investors with large funds like to create the impression that they will put all the money into the deal, especially an acquisition finance type deal. If you need $50 million in acquisition finance, and your bank suddenly has short arms, founder owned companies often turn to equity investors to bridge the gap between the bank and the full capital need.
The right capital to use, whether debt, equity or mezzanine debt is not an easy question to answer when deciding your acquisition financing. People usually default to market conventions such as 30% equity and 70% debt. Sometimes they may try an equity light approach, using a thin slice of equity burdened by a big wedge of debt. These decisions require deep thinking to analyze the underlying risk to the acquisition and the future growth of the company.