Private credit has had a good run over the past 12-18 months in a higher interest rate environment that has senior lenders retracting somewhat and unitranche retreating back up to the true middle market and away from the lower middle market. For Resolute Capital Partners, those conditions set the stage for one of the firm’s busiest years in terms of deployment, says Director of Investments Tyler Augusty.
“In 2023, I would say the form of deal that we got into was a little bit different than what we typically see,” Augusty said at the 2024 Nashville Smart Business Dealmakers Conference. “A lot of times we're coming in alongside a sponsor when they're making an acquisition of a new platform and we're providing debt and equity co-investment to support that acquisition. Most of our activity in ‘23 was actually to come in and provide additional debt and equity, either to supplement a senior credit facility or in the place of a senior credit facility who no longer had an appetite to continue on. And so, it was a good year for us from a deployment standpoint. But coming into this year, it seems like M&A pipelines are filling back up and it's going to be a little bit more traditional in terms of how we're going to get involved with our portfolio companies.”
He says the M&A market is starting to come back to reality, to some degree, from a seller expectation standpoint. 2021 and early 2022 was a market that hasn’t ever been seen before and he says isn’t likely to be seen again. That’s meant that some price discovery was needed in the market, something that comes from failed processes and expectations not being met in those processes.
“And so, especially on the sponsor side, in order to raise new funds, you got to show some returns,” he says. “Groups are more willing now to take a pretty good outcome over a greater and outstanding outcome because there are some of those pressures at the fund level to perform.”
A welcome addition that’s come down to the lower middle market from the middle market is the number of third party reports that sellers are producing themselves for potential buyers — quality earnings reports, market studies, reimbursement diligence, etc.
“Three years ago when we first heard about sell-side QofE, we discredited everything that it said because we're supposed to be the client of the QofE provider, and they're supposed to work for us and they're supposed to examine this business,” he says. “So, this coming from the seller themselves, obviously, had some questions about it. I think now it's something that makes a process run a lot more smoothly and something that's become a whole lot more common and can really streamline things.”
Sell-side QofEs, he says, makes lives easier on both sides. Though it comes with an added cost, it’s beneficial if it can facilitate a transaction process.
Structure and expectations, he says, have to be aligned in terms of the go-forward plan.
“If somebody wants to stick around for the next five years, you certainly want them to be invested both financially and emotionally,” Augusty says. “And so I think having that expectation — in particular what that core management team is going to be, what their roles are going to be one year, three years, five years post transaction — is critically important especially in lower end of the middle market where we play.”
He says often they’re dealing with founders and businesses who are talking to institutional capital providers for the first time. So, having sell-side advisers, even though it may cost a little bit more than might have been expected from the outset of the process, is a smart move that can help de-risk the transaction in the long run.
