Some private equity firms call them relationship managers. Others refer to them as the capital markets team. But whatever their title, in-house financing professionals have in recent years become increasingly important players in the private equity ecosystem.
While a lot of the debt in need of restructuring in the aftermath of the financial crisis has been amended and extended (at least for the time being – see p. 20), leveraged finance professionals remain as busy as ever, making sure their firms act sensibly when it comes to capital structures.
Some firms have had full-time in-house staff dedicated exclusively to financing activity for years. But it is only relatively recently that the practice has become more commonplace.
At The Riverside Company, capital markets partner Anne Hayes began co-ordinating the firm’s financing activities in 2008, monitoring (inter alia) who Riverside borrows from and who it doesn’t. But in March 2011, she took on the role of working exclusively on the firm’s partner-lender programme.
“Our overall view was we needed to have someone paying attention on a full-time basis to the debt markets and our providers, to carry out what has been the philosophy all along on the partner-lender side,” she says.
That philosophy, according to Hayes, focuses on making sure Riverside always has debt financing available – and from the right partners. “We prefer to work with folks that we know and trust on a serial basis,” she says.
As a result, Riverside maintains a “black list” of providers the firm is uncomfortable working with for a variety of reasons – for instance, if they’ve asked to be taken out of deals involving under-performing portfolio companies. “One of the worst things a lender could do is, if we hit a snag, not give us time to unravel that snag,” Hayes says.
Lenders who have a history of working with Riverside and are familiar with how the firm resolves portfolio company issues, on the other hand, will be more flexible.
Our overall view was we needed to have someone paying attention on a full-time basis to the debt markets and our providers, to carry out what has been the philosophy all along on the partner-lender side
One of the other benefits of having “serial” relationships is the ability to finance transactions in difficult lending environments. “When the debt markets were very challenging in 2009 we still got deals done,” she says. “A lot of shops couldn’t say that.”
Warburg Pincus has had a capital markets team since 1997. Managing director Christopher Turner leads a group that executes approximately $25 billion in debt and equity financings annually across the firm’s portfolio.
“We try to maintain a robust set of relationships, probably with about two dozen different financing sources across scale and style of lending,” he says. “We need to engage in outreach to these lenders and ensure that they know what we’re all about. So when the time comes and we need to work together, they are able to say ‘Oh yeah, Warburg Pincus, we know those guys.’”
A BROADER NET
It was not always the case that firms needed a deep bench of debt providers. Before the crisis, some general partners could afford to maintain a relatively small group of relationships but still access ample levels of financing to get deals done. After the crisis hit, however, and banks became much more disciplined, that all stopped. The lending market today is a much more fragmented place, with scattered pockets of financing.
“True ‘one stop’ shopping was really only one stop for a brief moment,” says Turner. “Versus the pre-crisis market, we [now] need to consider a broader set of financing sources for our transactions.”
For example, in the fourth quarter of 2011 when capital markets were all but frozen, Warburg Pincus had to finance five deals. It turned to different types of lenders for each one.
“It was not a fun time to be doing that,” Turner says. “The only reason we were able to do that is because we were able to look at those situations and say ‘You know who’d be the right call for this? Ares. Or Deutsche Bank. Or a small club of regional banks.’”
Having reliable lender relationships can also help to resolve situations where firms need to access financing in a short timeframe, according to Barry Dunn, a principal at GTCR. Dunn has been leading the debt capital markets effort at GTCR since 2000, though the firm only officially added the capital markets title in 2006.
“There’s always a twist and a turn; it’s always in the last day or two before signing or closing and that’s when you really need to know the decision-makers,” he says. While GTCR’s portfolio weathered the crisis reasonably well, on one occasion the firm needed to quickly find a financing solution.
“We arranged some financing that I was happy to get,” Dunn says. “I had a near-term maturity and I had a debt investor who was getting aggressive around the business.”
While financing private equity deals will always require some degree of last-minute decision making, one of the ways capital markets teams have grown more efficient in recent years is by adding sector-specific financing specialisation.
At CCMP Capital Advisors, a number of investment professionals also spend a portion of their time on capital markets. “By overlapping it with our practice areas, we not only have the relationships but we have the right relationships that match the practice,” says CCMP managing director Kevin O’Brien.
AT THE MARGIN
Of course, the importance of maintaining strong relationships with specific lenders does vary depending on the type of deal. Whereas a club deal in the lower end of the market might involve a small group of “relationship” banks, in the syndicated bank market a firm could end up with literally dozens of bank investors.
“There, relationships aren’t as important fundamentally as something like a club market execution,” says O’Brien,
There’s always a twist and a turn; it’s always in the last day or two before signing or closing and that’s when you really need to know the decision-makers
who focuses on making investments in the healthcare, consumer, retail and media sectors but also oversees debt capital markets transactions.
And regardless of the type of transaction, aspects such as terms and covenants are unlikely to be materially impacted by relationships, according to O’Brien.
“You may at the margin do a little better with someone you know, but that’s a lowest common denominator feature,” he says. “You don’t tend to get much latitude on that end.”
Even in situations where relationships carry the most weight, having a history of repeat business with a specific lender won’t make the difference between a successful deal and a deal gone wrong.
“If a company is not performing according to plan, the relationship will help – but it’s not going solve anything for you,” O’Brien says.
Not everyone is convinced that this approach is necessary. In-house specialists remain the exception rather than the norm, particularly in the mid-market.
“We’ve gotten together at a conference the last couple of years and there are usually 10 or 12 of us, so the expertise is still not that widely utilised,” says GTCR’s Dunn.
But while the degree to which firms use debt clearly varies, the growth of these in-house capital markets teams suggests that the industry increasingly recognises the importance of strong relationships with lenders – and not just in case things go wrong.
“[Most] firms use leverage to some extent,” Dunn points out. “We’re trying to make sure that we’re making prudent use of the leverage and really enhancing not only the return, but the risk/return on the deal overall.”