Today’s guest blogger is John Solimine, founding member and Managing Director of Verit Advisors®

When we published our introduction to the non-bank debt market and what family and private companies needed to know about it in January, lending activity was poised to achieve record levels. Following a strong 2019, loan markets were at their highest volume since January 2017, reflecting a robust M&A and financing environment. The first quarter began with a gallop as January and February set a strong tone.

Then COVID-19 hit and lending activity ground to a halt.

The good news now for family and privately-owned companies seeking to complete a sale, recapitalization, full or partial ESOP or similar strategic transaction is that both bank and non-bank lenders are back in business.

Triage in March, April and May, with Markets Reopening in June

In the early days of the pandemic, lenders focused exclusively on portfolio management, trying to grasp the impact of the coronavirus-induced recession on their credits while making few, if any, new loans. Their immediate concern was on companies’ abilities to preserve cash and service their debts as entire sectors’ revenue and operations, especially travel, dining, hospitality and consumer/retail, slid to zero virtually overnight.

Essentially, these alarming months were initially a discovery period for lenders and borrowers. Lenders recognized that companies were almost entirely focused on managing through the crisis, to ensure the health and welfare of their employees and to learn how to operate in a remote, socially distanced environment. At the same time, companies and commercial banks were consumed with understanding and implementing how the Small Business Administration’s Paycheck Protection Program (PPP) was supposed to work. This proved extremely time-consuming and frustrating at times, because the process of applying and securing approvals was evolving and complex.

With hindsight, it is clear that regardless of the shortcomings of the PPP’s design and implementation, its two tranches of funds helped avert a feared wave of small and medium-sized business failures. The willingness of the Federal Reserve Bank to provide liquidity and take unprecedented steps, such as buying bonds to support credit markets, also helped calm skittish lenders. Proactive private sector steps, such as commercial banks allowing borrowers to take a 90-day holiday or essentially a grace period on paying loan principal and interest, also provided welcome short-term relief.

By June, liquidity had returned to most sectors of the capital markets, including banks and private, non-bank lenders that provide funds to small and medium-sized businesses. During the last six weeks, Verit Advisors has seen a resurgence in new transaction activity, reflecting not only lender’s renewed interest in deploying capital and making fresh loans, but also company managements’ and boards’ willingness to again evaluate strategic alternatives. This activity is split between a backlog of transactions already in the pipeline from February and March and new activity, incremental to what we saw earlier this year.

Lenders are now competing for deals and have moved decisively from just managing their existing portfolios to deploying new capital. As one capital provider puts it, “the market has become increasingly acclimated to a fully virtual deal process, where transactions are reviewed, processed, diligenced, documented and closed without the principals ever meeting face-to-face.”[1]

Some Lending Practices Have Changed

Although lenders have returned, several changes in market practices are apparent. We believe one will be long lasting. It is an enhanced appreciation for the importance of comprehensive underwriting and due diligence. Lenders are taking a more deliberate and thoughtful approach to assessing borrowers’ resilience to adverse economic conditions and unexpected surprises. Sensitivity analysis and downside scenario modeling, recently neglected, are again in vogue.

We also see some private equity investors whose investment policy was previously to provide equity only in control situations now willing to make non-control investments, both in traditional and distressed situations. This reflects the need to make investments from the huge pools of capital they raised in recent years and now need to deploy, thus providing additional funds to support private company sales and recapitalizations. This is providing additional liquidity alternatives as well as operational and strategic expertise from an expanded pool of equity investors.

Verit Sees Renewed Activity for the Balance of the Year

We believe the outlook for the back half of the year is favorable for borrowers seeking to complete strategic transactions. An awareness exists among banks and non-banks that with the reopening of credit markets, they need to proactively lend given the renewed competitive marketplace.

On the demand side of the equation, we see an increased willingness by business owners to evaluate and pursue transactions. Some of this is due to COVID-19, which has accelerated owners into becoming sellers.  Others are spurred by the potential for tax changes with the upcoming presidential election. With the immediate operating crises of March, April and May behind them, still others are looking at generational transfer or ways to recapitalize their businesses, including through an outright sale, capital raise or ESOP transaction.

As cases of the coronavirus continue to increase to record levels in parts of the country that previously lagged, it is difficult to speculate. But at mid-year, valuations are highly supportive, an abundance of both debt and equity capital prevails, and an enhanced sense of urgency exists among business owners to evaluate strategic alternatives. This bodes well for financing activity in the second half. If anything, we expect these positive trends to accelerate.


[1] SPP Capital Partners commentary, June 2020