A group of private-equity firms have announced plans to move into middle-market financing claiming the market is underserved. But some bankers are noting that there is a lot of hype about this segment of the market and that the space is more crowded than the firms are making out. Apollo Management, Kohlberg Kravis Roberts & Co. and The Blackstone Group are among the firms looking to start business development corporations that will provide and invest in senior and unsecured loans and mezzanine debt to middle-market companies. Officials at the firms declined to comment while they are in the registration period.
The rationale is that banking consolidation has reduced the number of commercial lenders and banks have adopted a more risk-averse approach to lending that has resulted in tightened credit. Also, the average high-yield deal has increased so financing for smaller companies is more difficult as institutional investors seek to invest in larger deals.
According to Jim Connolly, president of Bank of America Business Capital, the mezzanine sector could be underserved, as buyers seek larger, more liquid offerings. But middle-market senior financing is not an underserved market, he states. "Traditional lenders do have a paradigm and during the late 90s, they exceeded the traditional boundaries," he suggested. As a result, in the last couple of years the market has rationalized. "But we are still seeing asset-based deals especially since the product is considered more mainstream," he added. Commercial lenders are increasingly willing to lend more on a cash flow basis as more predictable cash flows return. Because of this market liquidity, senior debt multiples are on the rise, he noted.