The Benefit of Counter Cyclical M&A Financing

Posted on: November 11th, 2022


M&A financing volume tends to follow a procyclical trend with robust growth in periods of macroeconomic strength. When rates are low and earnings are up, companies use M&A Financing as a way to grow faster. In the expansion stages of the economic cycle, much like the period 2017 through 2019, there are more buyers than good acquisition targets which means rising asset prices for all. Competition for deals can create high purchase prices which diminishes the probability of acceptable returns on equity for the buyers. As in most financial endeavors, ensuring a good purchase price is the single most important determinant of future returns. If you overpay on the front end, it takes a lot of work to recover and eke out acceptable returns.

Most M&A financing providers who have been lending for decades say that historical returns are best during countercyclical periods. When the economy is struggling and rates are rising, there are fewer buyers resulting in better purchases prices and overall better deal value. There are also fewer lenders looking to deploy capital which means the lenders can get better pricing and lower risk. Countercyclical M&A Financing growth is not for the faint of heart as it takes a real contrarian mindset and nerves of steel. To make aggressive acquisition moves when others are running scared takes courage of conviction. Countercyclical M&A Financing provides a cost-effective way to amass greater scale and resources, critical success factors for growth minded enterprises. Rather than acquiring at higher prices when the market is hot, buying when the market is cold gives you greater asset selectivity and more purchasing power.

Moreover, there is a greater range of M&A Financing providers to choose from provided you have structured a good deal. Often companies that close a deal in a down market plant the seeds for faster growth once the economy becomes favorable. The addition of more products, scale and diversification through countercyclical M&A financing expands their growth engine enabling them to achieve levels of breakaway growth speed previously unattainable.