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    In the world of private equity, there are a couple of interesting things at play in the middle market space and lots of competition. We're seeing regulated banks taking a prudent approach to deals and some business development companies (BDCs) possibly suffering a little from the equity markets. Here's why…

    Some BDCs are growth challenged because they're trading at discounts to net asset value (NAV). To grow their loan books, BDCs need to raise new equity.  But with their depressed share prices, they can't issue new equity without diluting existing shareholders, which is something most BDCs have refrained from doing. However, those same BDCs can still put money to work by recycling capital when they have loan repayments.

    For example, if a BDC has $2 billion in assets, in any given year it will likely have at least $400 - $500 million that will mature or be repaid early. The BDC can take that money and re-lend it.  So, they can still maintain relationships and do new business, but they just can't grow assets. Numerous BDCs are currently in that position.

    There are actually a handful of BDCs that are trading above NAV and that are performing well, even though they all still have, compared to banks, a higher cost of capital and they have higher yield expectations. These firms are transacting higher cost financings - the deals that have more leverage and looser structures with blended rates that are higher than the senior financing deals that banks do. Private equity firms are increasingly willing to consider these new and aggressive forms of financing from unregulated lenders. Five years ago you would have heard a different story with PE firms less likely to utilize these structures. I think it's safe to say that appetite for risk is all relative.

    Banks, on the other hand, are picking their spots. As regulated entities, banks need to work within the framework of the leveraged lending guidance established by the regulators which generally results in more conservative loans and structures. We work with a lot of sponsors who continue to take a more conservative approach to deals and aren't comfortable pushing leverage and appreciate lower rates and more breathing room.

    Bottom line is there are more ways to finance buyouts than ever and certainly no shortage of competition.

    Tom Hobbis is Managing Director of  CIT Sponsor Finance, and is responsible for East Coast Sponsor Coverage. CIT Sponsor Finance provides cash flow and asset-based senior debt for private equity-backed transactions in the middle market throughout the United States and Canada. Hobbis has nearly 25 years of experience in the finance sector. He holds a BA from Gettysburg College and an MBA in International Finance from Fordham University.

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