Financial Experts See Hope for Mid-Market Firms
Jun. 7, 2010
As the economy moves from recession into recovery, the nation’s largest companies have been more successful in securing loans and capital than their smaller counterparts. Still, recovery for small and mid-market companies may be on the horizon, according to a panel of financial experts who spoke at a recent UT Dallas conference.
A panel of professionals who specialize in mid-market lending and financing addressed the topic: “Where Will Growth Capital Come From?” at a conference held at the School of Management and sponsored by the school’s Center for Finance Strategy Innovation.
Cautiously optimistic, the speakers told the audience that middle-market firms looking to finance growth may slowly see lending hurdles diminish, but businesses face tighter lending terms and may want to consider non-traditional alternatives.
“The GDP we have right now is equivalent to the GDP that existed in mid-2008, so on a GDP basis, we’re back to where we were two years ago,” said David Oden, a partner with Haynes & Boone who moderated the panel. “But two years ago, I was fat, dumb and happy, and today I’m no longer fat, nor am I happy.”
Still, Oden said, the current lending environment has improved since a year ago, when the market was much more volatile. One of Oden’s colleagues, he said, assessed today’s environment thusly: “The fear of a year ago has dissipated and now things are flat. Flat is the new up.”
Oden agrees. “Things are at least holding steady. They’re clearly not getting any worse. They’re probably getting better,” he said. “I don’t think we’re getting through this recession in a rip-roaring fashion. I think we’re kind of creeping our way out of it.”
Mary Jo Hoch, senior vice president of Capital One Bank, said banks that are offering loans will use secured lending and will not lend solely against future cash flows. This observation was echoed by Ron Stacey, managing director of Legacy Advisors, an investment banking firm that specializes in middle-market mergers and acquisitions, corporate financing and financial restructuring.
Stacey added that there are alternative sources of capital available. “If you need growth capital, there are ways to get it, especially finance companies, which are non-regulated and are coming into the markets now. We’re getting two or three calls a week from asset-based finance companies that are starting to fill this void,” Stacey said.
Jorge Jaramillo, a director of ORIX Capital, a large international lender new to the Dallas area, stressed that loans are available, especially for the stronger and larger mid-market companies and for special situations such as acquisitions and restructurings, but equity requirements for loans are now higher.
The panelists agreed that loan standards are now higher and asset-based lending is at the center of activity. “Equipment needs can be done on a leasing basis. Sometimes you can do sale leaseback on real estate. The market is pretty active and driven mostly by private investors,” Stacey said.
“There is money out there and deals are getting done,” said Trey Vincent, principal at the Riverside Company, a private equity firm that invests in equity positions in middle-market firms. “But while we are aggressively looking for deals to do, we are much more cautious.”
Vincent said during these difficult economic times, companies are much more careful about which companies they choose to fund. When evaluating an investment, Vincent said he considers three factors: a firm’s growth potential, whether it specializes in a niche market and the quality of its management team.
“That growth potential coupled with a strong management team is really where we want to place our money,” Vincent said.