How to talk to lenders
Hi All,
Was digging through the forum archives and haven't found anything good about how to talk to lenders from a PE perspective. I was wondering for those who have had a decent amount of time in the diligence process, what are some tips / tricks you use when speaking through an investment and negotiating terms with lenders (Oaktree, Ares, Varagon etc). What are some pittfalls that you don't talk about when presenting the deal / answering diligence questions to them?
Thanks in advance!
NSL, have you checked out these or run a search:
You're welcome.
Bump
The same way you’d chat up a random girl at the bar whom you’re trying to sleep with.
OP then will proceed to ask you how to talk to girls. What language should he use? Should he understand what Rekt, ghosting, DMs mean?
Jeez, half some faith in these excel monkeys... I’m sure after being ghosted and being left on read without replies they know what it means by now.
Totally makes sense from an investment perspective.
Perhaps I should have phrased my question better - I was almost looking more to what I should avoid. I.e. not disclosing purchase price multiple as they may lower their leverage read (if initially they priced higher), thoughts on competitors etc. Also nuances such as asking them if they have any other trees in their group to get more information about how competitive the deal is etc.
Although I have the basics, I'm always a bit afraid I'm letting out too much information that will later haunt me in the process.
I work for a credit fund, so from my perspective, the poster above is right. If you're withholding information that's likely to cause someone to re-think their leverage read, it's something that's either going to come out through the diligence process and may result in a re-trade closer to close or come out post-close and you'll have a lender that may not be happy with the credit. Either result isn't great. This is a repeat business, and the groups we'll stretch on leverage and terms for are the ones that we know are being upfront with us about the risks of the deal and notable transaction dynamics.
The corollary to that and the advice I'd give is to think through the questions we're likely to ask and have solid answers. To use the examples above, if there's significant customer concentration, why isn't that customer going to leave? If there's regulatory risk, what work have you done to indicate that the worst case scenario won't happen or the company is ready to shift with changing regulation?
YMMV as we're very relationship focused, and there's enough lenders out there now that you can keep pushing groups around, but seems like a tough was to do business IMO.
Obviously it seems as though you have some of the basics ex. by no means should you ask them how many trees they have the deal in from, just shows poorly as a firm / disrespectful. You want to be cognizant that they want to be a partner with you in a transaction not just a lender, so speak to them about what they want to hear aka answering their diligence questions, update them on process, invite them to dial-in or attend MP’s. It’s probably a good idea to avoid disclosing purchase price earlier in the stage but be cognizant that most private credit shops have a minimum 35-40% equity cap. Lenders appreciate when you are transparent with them aka telling them I’ve talked to a few financing parties who are leaning towards 5.00-5.50x rather than 4.50x leverage read you provided. Those are just a few examples.
Thanks Mamba - exactly what I was looking for - i.e. I'll hear some of the IP's ask about trees on their calls here, but didn't realize it showed poorly / was disrespectful.
Anything other examples you can think of that perhaps the rest of the community could learn from? Haven't seen much on WSO about lender interactions as of now
Under certain circumstances if you have good relationships with lenders, sometimes it is okay to ask if they have the deal in-house and usually you will get a yes or no answer, but err on the side of caution. Asking how many trees they have it in from influences the process and should be avoided. Feeding lenders the same kind of diligence you expect is always appreciated as well and sharing any relevant customer / industry calls is always appreciated. In terms of once a deal is closed with a lender, I think some tidbits of advice is to always be proactive with the Company's performance ex. if a lender has board observation or a seat on the BOD (if they also invested equity in the deal) then keeping them updated with any issues prior to distribution of monthly financials or a BOD meeting is always a good idea so there are no surprises. When the Company breaches a covenant, work with the lender to find an appropriate resolution (ex. equity cure). Once you have a deal signed up and have selected a lender and working with counsel, it's always a good idea to be clear with the lender on what your objectives are for heavily negotiated terms between your counsel and the lender's counsel so it doesn't seem like you are trying to sneak in anything.
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