By Reed Upson, Managing Director, BizCap®

In recent weeks, the financial world has been abuzz with talk of bank turmoil, the probability of a recession, and alternative lenders and private credit funds stepping into the limelight. The backdrop? A renewed focus on bank regulations and capital requirements, coupled with continued rising interest rates and the shrinking of government sponsored liquidity (i.e. PPP money) available in the marketplace…

At BizCap® (Business Capital since 2002), we’re on the pulse of these developments and wanted to share some further observations we are seeing in the market today:

1. Shifting Bank Dynamics: Banks are recalibrating their strategies, emphasizing relationship lending, treasury management, and capital reserves. In the near term, this recalibration is leading to reduced bank lending, especially for lower and middle market businesses, and stricter credit policies. At BizCap® we expect these trends to continue for at least the next 6-12 months.

2. Active Lower Middle Market: Capital, from private credit and alternative lenders, is abundant. We are continuing to see major asset managers like Bain, KKR, Comvest and others launching new private credit funds aimed at lower and middle market opportunities. Competition for high quality transactions remains fierce with many alternative lenders still willing to stretch on pricing and structure for the right deal. At BizCap® we are observing strong deal activity, especially in specific areas of private credit like asset based lending and special situations / distressed credit funds.

3. Navigating Challenges Amidst Rising Deal Activity: Despite the activity observed above, we are also seeing an increase in problems and complexity being faced by owners and sponsors. From a deal flow perspective there is a “flight to quality” with ‘outside of the box’ transactions having a more difficult time gaining attention. Moreover, we are seeing an increase in reported “problem loans” as well as defaults – particularly in challenged sectors where businesses operate with lower operating margins and where inflation, supply chain woes, and debt costs have had a major impact. At BizCap® we are actively structuring many senior “stretch” credit facilities to meet the needs of these more challenging credit situations.

4. Resilient M&A: While new platform M&A acquisition activity has certainly slowed, due principally to the rapid rise in interest rates and valuation gaps created among buyers and sellers, add-on acquisitions are proving pivotal in keeping sponsors and private credit engaged. Market whispers suggest a backlog of M&A activity awaits in 2024 with a more favorable economic outlook.

Amidst all of this uncertainty, the team at BizCap® is poised to continuing navigating businesses and sponsors through these changing tides, leveraging 20+ years’ experience securing optimal solutions in challenging environments.

About the Author

Reed Upson, Managing Director of BizCap® (Business Capital since 2002). BizCap® delivers the best available cost of capital and industry leading structure to middle-market and lower middle-market companies seeking innovative financial strategies. The Company’s experience and long-standing network of high-level relationships with capital providers across a variety of disciplines allows the firm to efficiently deliver solutions for clients, particularly when they need immediate liquidity at a time when conventional sources of funding may be challenging or unobtainable.