Private equity sponsors struggle to make sense of the new ...

RoundtableIt’s been a little more than 19 months since Lehman Brothers collapsed,sending the global credit market into a state of upheavalthat only recently has started to settle. For participants in the middlemarket, it’s been a slow rebuild. Dealmakers initially overloadeddeals with equity in order to stay active. Then the asset-based loanmarket opened up, while mezzanine debt helped fill in some holes. Recently,signs of life can be found in a CLO market that has up untilrecently been comatose, while senior cash flow lenders, at least thosewith secure funding, have been eager to back quality credits.“I’m convincedWall Street willfind a way; theyalways seem to.Elizabeth BorowManaging DirectorThompson Street Capital”It’s a bifurcated market, to be sure, with a split occurringbetween the targets that need to sell and thestrong companies that can. But the dearth of qualityhas translated into attractive terms that for strong credits,in some cases, may rival what buyers saw at the onsetof the bubble.Mergers & Acquisitions brought together top namesin finance and private equity in March to discuss thestate of the market and where exactly it goes from here.Taking part in the discussion were Elizabeth Borow,of Thompson Street Capital, Mark Cordes, of AudaxGroup, John Cozzi, of AEA Investors, Nautic Partners’Christopher Crosby, Devon Russell, of Madison CapitalFunding, Parthenon Capital’s William Wintererand Gary Zussman, of Goldberg Kohn. The followingis a condensed and edited version of the conversation.Mergers & Acquisitions:It seems like there are a fewpockets of strength today,such as the mezzanine andasset-backed market. On theother hand, a lot of the newsenior lending groupsformed in the wake of thedislocation have had troublegaining traction, and theCLOs, even as there is moreoptimism in this area, are afar cry from what we sawin 2007. As a jumping offpoint, what does the competitiveenvironment looklike in the debt markets right now?Russell: Well, it only takes one competitor to keep youhonest, so I would say that it’s still competitive. In themiddle market, we’ve swung back to the early 2000’s,when debt was arranged on more of a club basis.At the peak of the bubble, there were probably 20-plus competitors looking for the lead positions in deals,who were willing to underwrite and syndicate. Thatnumber is probably down to three or four, today. Butbased on the current volumes, the handful who are activeare adequate to keep lenders honest at this stage ofthe game. I’d also say that the risk of execution is diminishingdaily, but you’ll still see clients try to forma coalition and bring lenders together on one commonterm sheet.Zussman: At Goldberg Kohn, the bulk of our time in2009 went from primarily transactional work to theinverse of that, where we ended up doing a lot of workouts. Around the middle of the year, the ABL (assetbasedloan) market started to rebound and more recently,we’ve seen a pick up in cash flow deals.Borow: While people talk about the difficult financingmarkets, we actually found it very challenging on theinvestment front. There just hasn’t been a lot of qualitydeals in the pipeline. We closed one new platformlast year, and we were surprised to find that it wasn’t thatdifficult to raise financing for the deal. It’s a binarymarket; if you can find a very good deal, you’ll attractlenders, but if not, they’ll head for the hills.This year we’ve seen more lenders come back to38 MERGERS & ACQUISITIONS May 2010