Choose High Conviction Acquisition Financing

Posted on: February 13th, 2024


Acquisition financing lenders in the middle market come in many forms and have unique backgrounds resulting in a high level of market differentiation. Most acquisition financing principals have formative experiences working on certain types of deals and develop a wide range of engagement skills through apprenticing with older dealmakers. Through this experience they develop unique investment acumen in certain industries which they then capitalize on through sourcing deals that match their industry thesis.

While most acquisition financing lenders profess to be industry generalists, the truth is that they prefer industries they have had enormous success with, so called high conviction industries. In a high conviction industry, the lender intuitively knows the company is a good one to lend to due to their strong command of the underlying economics of the industry. Often the industry is in a state of growth due to excess market demand as evidenced by unit volume increase, gross margin expansion and pricing strength. The industry may also be in a period of high investment by private equity groups leading roll-up consolidations, which buoys the underlying valuations of all companies in the market.

In addition, the industry may be transitioning to a higher value add position with its customers, resulting in the creation of stronger relationships and the emergence of contractual revenue streams. These high conviction industries are highly favored by lenders who see them as a low risk, asset class due to this confluence of factors. Companies in need of acquisition financing should lean heavily toward working with high conviction lenders for a number of reasons. These lenders are usually much more enthusiastic about your deal than the average non-industry convicted lender. Due to their knowledge base, they do not have to be extensively educated and can move through business diligence at a faster speed. They are also more likely to price the deal at an attractive rate than other lenders, due to their desirability of the asset class. Most importantly, due to their command of industry fundamentals, they see the big picture and are sanguine if things do not go according to plan.