By now you’ve likely heard that the tide of easy lending from local and regional banks has started to recede in 2023.  Credit decisions have slowed and borrowing standards have edged higher.  We’ve certainly seen it as we talk with business owners in our industry and other capital providers.  What is a fuel distribution or HVAC company with an unrelenting need for cash to grow organically or by acquisition to do?  It is unclear if access to bank credit will grow more difficult as we roll into 2024, but it is worth mentioning that a new player has (not so quietly) moved onto the field to help business owners in our industry achieve their goals.  This player has been around for years, although many still are unaware.  And I should note that some of your largest competitors are already quite familiar with this hotshot:  private capital. 

Global private credit funds have grown a whopping 460% over the past decade and now stand at $1.4 trillion globally.  Investment data company Preqin reports that over $800 billion of this private credit is focused on the North American market and is projecting the available resources in this segment will grow to $1.4 trillion in North America alone within the next 5 years.1  In addition, mezzanine funds which lend money that ranks behind senior debt and carries higher interest rates are raising more capital than ever in 2023.2  

I’m a Player.  What Does this Mean for Me? 

Despite the ups and downs of the banking environment you as a business owner have goals that must be achieved, whether it be that once in a decade acquisition opportunity in your region, ongoing tuck-ins to meet growth targets, taking chips off the table for retirement or simply purchasing the equipment and facilities necessary to compete.  Private funds are stepping in where traditional banks have stepped back to offer equity and debt solutions to keep the deals going.  In addition to equity investments, this private capital can take the form of senior debt, mezzanine (or higher rate subordinated debt) and unitranche loans (i.e., hybrid senior and subordinated debt in a single loan with a combined interest rate and covenants). 

Access to private capital in the lower middle market – that portion of the market generally comprised of companies with revenues between $10 million and $100 million, where most of our industry operates – has become much more prevalent, especially for those companies generating $2 million in EBITDA and higher.  I can attest from recent capital conferences I’ve attended that private capital is more focused than ever on this segment of the market.  These resources are becoming a go-to solution for our industry to refinance debt in a rising interest rate environment, recapitalize and win acquisitions in a competitive environment. 

Head on a Swivel.  Play Offense and Defense. 

Private capital providers are free to structure corporate credit deals with more flexibility than regulated banks and can do so at rates that are competitive while being tied to the risk profile of the company.  This being said, structures remain rational and client creditworthiness is paramount.  As with traditional leveraged borrowing, the private capital pricing and structures we see available now may change as the broader capital markets continue to tighten.  Businesses utilizing private credit must understand the risks associated with the debt structure offered to them and continue to perform as they would with any lender, but the broader access to capital solutions is compelling. 

As fuel distribution and HVAC industry consolidation marches on and the threat of environmental regulation slowly morphs on a state-by-state basis into a new operating and administrative reality, we will increasingly be an industry of haves and have nots.  The largest consolidators in the industry are already adept at tapping into private equity and private credit to fund growth. Businesses which have heretofore been outside of the mainstream of such solutions should be investigating these avenues.  Sure, keep that relationship intact with your local bank.  But know that the game has changed and there are now more creative solutions to grow than you may have seen in the past.   

1 Source: Preqin, “Private Debt Untroubled by Turbulence” by RF Joshua, October 5, 2022

2 Source: Reuters, “Private Credit Partygoers Reach for the Hard Stuff” by J. Guilford and N. Unmack, October 12, 2023