The Robust Market for Non-Bank Acquisition Financing

Posted on: June 29th, 2023


Acquisition financing is a form of capital used to fund the purchase a wide range of assets including an ownership stake, outright control of a business or a hard asset such as real estate. Acquisition financing is dispensed from a variety of credit platforms which cater to specific asset classes, risk levels and check sizes. There is tremendous depth to the US acquisition financing industry especially as it relates to the middle market which has resulted in the emergence of two distinct markets – the bank market and the non-bank market also known as the private debt market. These two markets arose in a symbiotic manner with the non-bank market satisfying the areas that banks had under-served.

Originally the non-bank market was confined to mezzanine or close to mezzanine type returns 10% to 12%, due to their cost structure and lack of scale. Following the Great Recession during the quantitative easing period of close to zero interest rates, non-bank institutions grew at an accelerated rate as they were able to go public, lower their costs as well as their pricing. Pricing decreased to single digits in the 6% to 8% range during this period. This build-up in scale created more effective risk diversification and management. It also allowed these institutions to compete directly with banks in a manner that they had previously not been able to. Originally, non-bank lenders specialized in providing risk capital in an acquisition financing leveraged buyout deals where banks would not lend.

Due to the large increase in assets undermanagement, these credit platforms are now offering a wide variety of credit solutions, far afield from their original acquisition financing strategies. They now offer direct lending solutions to companies that cover the spectrum of capital needs including acquisition financing, growth capital as well as general commercial finance needs. Whereas in the 1980’s non-bank lenders were usually a division of a larger industrial company, with asset bases in the low single digit billions, these new non-bank lenders are massive with many having assets in excess of $100 billion. When scouring the market for acquisition financing, it is important to cover both the bank and non-bank market in your outreach. While the Banks have a pricing advantage, non-banks often offer other benefits such as higher levels of speed, astuteness, and flexibility which can be difference-makers.