What role do non-bank finance companies play in private equity transactions today?

There’s been an undeniable shift in recent years and non-bank finance companies now play an increasingly broader role in leveraged finance transactions. If you look at market participation rates, less than 25 percent of the lending on mid-market private equity sponsor recaps is absorbed by traditional commercial banks.

As a result of a number of factors, banks have been effectively dis-intermediated by non-bank financials and their impact on liquidity, pricing, and structure is material. Variables that haven’t changed are risk management as well as tolerance for cycles and that’s where the traditional banks excel.

Banks still play a vital role in leveraged finance transactions and M&T Bank specifically continues to support operating companies in its communities with scale, execution and experience. Continuity in market as a trusted capital provider remains critical and our view is that non-bank lenders often struggle to match that value proposition.

How do traditional banks differ from non-bank finance companies?

Full service financial institutions such as M&T offer a complete suite of products and services to support our clients. The relationship goes beyond funding a single transaction — we can support our clients’ multiple business objectives on an ongoing basis to achieve their growth objectives.

This full-service solution helps clients navigate markets, cycles, and events whereas the typical non-bank provider isn’t as flexible. Banks have the infrastructure to be patient capital providers and true partners in the process. That’s not how most non-bank finance companies are set up and that’s not their strength — they’re transactional lenders with no appetite to handle much else.

How will the deregulation of banks impact non-finance companies?

Non-bank finance companies have enjoyed plenty runway as banks deal with heightened regulations. Interagency guidance on leveraged lending is definitely a catalyst to the rise of alternative lending sources and drives share away from banks.

That said, traditional financial institutions understand and embrace sensible regulation as a necessary part of doing business — however, keep in mind, leveraged lending in and to the mid-market did not contribute to the financial crisis yet traditional bank providers were mandated to curb a very successful and well-managed component of their relationship banking strategies.

M&T still thrives in the current environment because we’re serious about doing the right thing for our clients — however, no one likes to spend more on regulation than they think is wise. Deregulation will certainly affect non-banks as their competitive advantage will be diluted. I think traditional banks will still remain cautious and prudent in a deregulated world but they will also be more thoughtful and creative as to how they serve their clients.

What should borrowers look for in non-bank finance companies?

It boils down to the relationships in the end. If a borrower is considering working with a non-bank finance company, they should think about the temperament and character of the provider. Who is going to be on the other end of the phone or responding to your emails?

At M&T you get bulge bracket execution with a middle market feel. You get a higher level of engagement from senior staff that will take your call, face your problems, work for your success and execute on your strategy. You also have a team that can ride through market cycles. Our portfolio mandates that we think about cycles. Non-bank finance companies may not be able to ride out market cycles and give you those other advantages.

What can we expect from the lending industry going forward?

Despite their differences, banks and alternative lenders will work together more frequently. Non-bank finance companies have a great deal of flexibility while traditional banks have the established credibility. Together these two approaches can come up with attractive solutions to meet clients’ needs. The market is asking us to do this. If you do not find the right solutions for your clients you will not remain relevant. The market forces us to keep getting better at what we do. We are excited to see the opportunities out there and what we can bring to our clients to be as constructive as possible.

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This content is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.

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About the Author

Based in Baltimore, Maryland, Aji Fadahunsi is a Managing Director in the Investment Banking division of M&T Bank. Mr. Fadahunsi supports leverage finance transactions for sponsored and non-sponsored companies often in the context of M&A transactions.

Over the last 12 years, Mr. Fadahunsi has executed transactions across a variety of industries in the middle market totaling more than $12 billion. M&T Bank is a regional bank with over $100 billion in assets and works to meet its clients’ immediate needs as well as help them scale for the future.