Most people are watching the wrong metric.
The bigger shift we are seeing right now is not just volatility or pricing. It is happening in the capital stack.
Our managing partner, Richard Consul, CFA, recently sat down on the In the Harbor podcast (Rock Harbor LLC) and talked through what we are seeing firsthand at Bankers Edge while helping clients complete leveraged buyouts. One of the clearest changes is in leverage availability.
12 to 18 months ago, you could often get 3.5 to 4 turns of leverage on lower middle market deals. Today, that number is closer to 2.5 turns in private credit. That is a meaningful shift.
For a $100M transaction, that gap translates into a significantly larger equity check required to close the deal. In practice, that means tighter structures, more pressure on returns, and in many cases, deals that simply do not get done.
Part of this is driven by real credit tightening. But part of it is also how lenders are managing and positioning their portfolios, especially larger platforms that need to demonstrate stronger underwriting and stable performance.
So while a lot of attention is still on rates and multiples, the more important question might be: how much leverage is actually available to complete a transaction?
That is where we are seeing real change.
Episode transcript (excerpt)
“What do we do at Bankers Edge? We help companies complete leveraged buyouts by going into the private credit and private equity world to round out the capital stack. You buy a $100 million company, you’ve got $20 million in equity – you’ve got to come up with the other $80 million in debt and equity, and we go help raise that money.
What are we seeing in real time? Last year you could have probably gotten 3.5–4 turns on some of these businesses in the lower middle market in debt, which means I need to raise a lot less in equity. What we’ve seen in real time is leverage that used to be at 4 is now probably closer to 2.5 in private credit land.
The big BDCs – Ares, Apollo and the like – have to report their performance. What’s a great way to report performance? ‘Our credit underwriting has really improved; we’ve gone from four turns down to 2.5 turns of leverage.’ So what we’re seeing in real time is the leverage available to complete a transaction is really shrinking – you can’t get as much leverage as you could 12–18 months ago.”
Richard Consul, CFA | Mitch Vermet, CFA, CAIA