Advanced private credit investment/diligence process questions
Been preparing for private credit recruiting for a little while now. As I've learned about the investment process at direct lending funds, I have the following questions come up:
1.) What happens if multiple sponsors send you a CIM for the same opportunity? At what point in the process does the credit fund have to pick which buyer they are submitting their final terms to?
2.) When are term grids used in the negotiation process vs. term sheets? Are term grids used by sponsors right away to compare terms? Are grids the most common way proposals are gathered now?
3.) When beginning diligence after signing an NDA, what is the first step in the diligence process? Are you given just a CIM or full access to dataroom? Would you do a first pass using just the CIM or other data from the dataroom? Do you typically put together a screening memo for each opportunity you get into the dataroom for?
4.) What kind of sponsor work is available in the dataroom? I know you get access to third-party work commissioned by the Sponsor as well as QofE, but do you get access to their analysis and certain IC slides?
Handling Multiple Sponsors Sending the Same CIM:
If multiple sponsors send a CIM for the same opportunity, the credit fund typically evaluates the opportunity independently of the sponsor at first. However, as the process progresses, the fund will need to align with one sponsor to submit final terms. This decision is usually made after initial diligence and discussions with the sponsors, based on factors like the sponsor's track record, alignment with the credit fund's strategy, and the likelihood of the deal closing successfully. The fund must pick which buyer to support before submitting final terms to avoid conflicts of interest.
Term Grids vs. Term Sheets in Negotiations:
Grids are indeed a common way for sponsors to gather proposals initially, as they streamline the comparison process. Term sheets come into play once the sponsor has narrowed down their options and is ready to negotiate specifics.
First Steps in Diligence After Signing an NDA:
After signing an NDA, the first step in diligence typically involves reviewing the CIM. In most cases, you are initially provided with the CIM and not full access to the dataroom. A first pass is often conducted using just the CIM to assess the opportunity's high-level merits, such as financials, business model, and industry dynamics. If the opportunity passes this initial screening, the fund may then gain access to the dataroom for deeper diligence. At this stage, a screening memo is often prepared to summarize the opportunity and present it to the investment committee for a go/no-go decision on further diligence.
Sponsor Work Available in the Dataroom:
The dataroom typically includes third-party work commissioned by the sponsor, such as Quality of Earnings (QoE) reports, market studies, and legal diligence. However, sponsors generally do not provide their internal analysis or investment committee (IC) slides, as these are proprietary. The credit fund will rely on its own analysis and diligence calls to validate the sponsor's work and ensure an independent assessment of the opportunity.
Sources: Financial modelling on the buyside, Credit Fund to PE: Is it Doable, Overview of Sell-Side M&A, Sponsors coverage in Australia, Best way to read a CIM?
Bumping - did an internship in levfin/sponsors previously, and think these are all interesting questions.
Can try to answer 2 based off my brief stint. I think pe cap markets guys have enough colour on terms they expect to clear the market, and can put together an indicative grid pretty quickly. I was staffed on an underwrite and only a grid was used in the process. I'd suspect things are similar on the private side. Re your 4th question - while I have no definitive answer to give you, I'm not sure a KKR would be comfortable giving away work they've done on an opportunity to get financing from a Blackstone, especially since the Blackstone in question also has an equity team evaluating the same opportunity. Completely a guess, and would also like to know.
AVP at a PC megfund here, can share my experience but this may differ somewhat from MM funds.
1.) Multiple sponsors means multiple cap stack pages in the front of your IC memo - that's it. One deal team, one IC discussion, one diligence process; the different sponsors likely ask for different structures (leverage, all senior vs. pref stack, equity co-invest, etc.) so you toss a page upfront to discuss and then send term sheets to all of them. More sponsor trees = higher likelihood one of your sponsors wins and you do the deal.
2.) At this point sponsors almost always fire off a grid first thing, it's just easier and quicker. If you're the lucky fund who wins the grid negotiation then you'll fire off your TS. (note that sometimes a credit fund will send a 1-pager TS before the grid comes across, but in this case the TS is scrapped in favor of the grid).
3.) Typically CIM comes across with model. You pull together an initial diligence list based on those and set up a call with the sponsor. The answer to 90% of your questions is "we'll get you access to the dataroom" but hey, you're "showing interest".
You always always get into VDR before building out a memo. Your time is valuable (this isn't IB) so you need to get through all your "immediate kill" datacuts (retention, concentration, financial trends, IP analysis, etc.) to determine if you'll proceed with a memo. Once you decide to pursue the deal, you verbally discuss high-level terms with the sponsor to make sure you're in the right ballpark, then it's full steam ahead for an IC discussion.
4.) VDR is very deal-specific. I've been in VDRs with 10,000 files and I've been in VDRs with 10. Sponsor typically will include QofE and financial diligence, but likely won't share industry work if they've retained consultants to do that and they definitely won't share their IC materials. With that said, if it's a sponsor you have a good history with, you can request anything you want and I've had folks share their entire internal IC memos with me in the past. It's still a relationship based industry despite the increasing competition and increasingly insane requests by sponsors.
Thanks for the great response - really appreciate it. In terms of grids, how detailed are these (do they contain key baskets for most covenants?) and does the Sponsor include all of their "asks" in terms of loan size, rate, etc.? Also, how detailed is the model received? Does it typically include drivers or is it usually a hardcoded output?
I'm at a MM fund - slight differences vs. MF responses above
2. In MM land, if you're dealing with a Sponsor that does not have a capital markets team (i.e., you're speaking directly with the deal team), we usually will submit a term sheet, then receive a grid that aggregates the best terms of all lender-proposed term sheets, which we are then asked to respond to with "best and final" terms. When a cap markets team is involved, it's much more normal to be asked to respond to a grid vs. submitting a term sheet
3. Depends on the process. In a typical vanilla banker-run sale process we would generally get a CIM to see if it would be a fit for us from the Sponsor. If it is, we'll staff a team on it and start to pull together questions / request access to a data room. The ability to get into a data room is typically governed by the banker, and they'll sometimes not allow lenders into data rooms until late in processes (i.e., near LOI bids and after MPs). It's generally difficult to pull together a screening memo based on just a CIM. In proprietary processes / refinancings, you may get a full data dump right after signing an NDA, which can be good or bad if you're a junior
4. Practically speaking, the VDRs that we deal with generally have zero Sponsor work in them, as they are managed by the investment bank. We will typically receive snippets of Sponsor IC memos and their analyses one-off after we ask specific questions, but these types of files are not in the data rooms. Same thing with third party reports, we would just execute an NRL and receive it via email. To answer your questions more holistically, the type of Sponsor work you get is almost entirely dependent on the Sponsor, but the very bare minimum is a financial model and third party reports. Better relationships = better visibility. It's in the Sponsor's best interest to get you up to speed as fast as possible and to get you through IC, especially in hairier situations
Appreciate you taking the time to answer these. When you say "investment bank" does that mean an advisor hired by the sponsor that is bidding to arrange the financing? Also, similar to above, curious how detailed the model provided is - does it have granular drivers or is it mostly summary output projections?
In MM, Sponsors don't really hire advisors to arrange financing, they either have an internal capital markets team that does this for them, or the deal team handles it directly. This is why the further down market you go, the more relationship-based this profession is. The principal at a PE fund doesn't want to have to go out to 10 lenders to get financing and answer diligence questions, they'd rather just go to their top 3-4 lenders and know they can get something done quickly
The investment bank I'm referring to is the one that is running the sale process (i.e, the one that puts together the CIM). Usually as a lender you will get added to the broader deal data room as essentially a member of the Sponsor's deal team
Models we get are typically fairly granular, it's usually a "lender case" within their broader operating model. So it has all the drivers, but the equity returns analyses and detailed equity tranches are stripped out, and projections are a bit less aggressive. We've had instances where we literally just get a PDF with summary output projections though - it depends Sponsor to Sponsor
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