CEO
Main Street Capital
Historically, how has the private equity world interacted with the asset-based lending industry?
How has that relationship evolved over the years and how would you describe it currently?
In addition, the growth of the direct lending industry, where both publicly-traded and private debt capital investment firms have experienced significant growth and are very active in providing cash flow and enterprise value term loans, has taken a significant portion of the market share for first lien debt facilities in private equity-backed transactions.
Private equity firms have usually been referral sources for asset-based lenders, but are some firms that may do some private equity in addition to other investing cutting out the ABL ‘middle man’ and providing secured financing themselves?
I do think that more investment firms have been emerging over the last couple of years with more flexible investment strategies and mandates — similar to our lower middle-market
investment strategy that we’ve been executing here at Main Street for the last two decades — that allow for combined debt and equity investment strategies. However, I wouldn’t characterize those investment strategies as strategies that are eliminating opportunities for asset-based lenders.
Hyzak: As I mentioned earlier, I think that there has been growth in the number of firms with these types of flexible strategies over the last couple of years and I expect that the industry will see that growth continue going forward. I think that there are two primary reasons for the growth.
The second is a recent acknowledgement by some firms that the private owners of many businesses do not always want to sell either 100% or even a controlling interest in their companies. A combined debt and equity strategy can be a very attractive solution for these types of companies. We’ve employed this strategy and approach in our lower middle-market investment strategy for the last two decades. As a result, our experience has been that providing a combination of debt and equity solutions to our portfolio companies, their owners and management teams has been very well received by those companies that are trying to solve a financing need but do not want to give up control of the company to a third party.
Hyzak: The direct lending solutions that I mentioned earlier [are] likely the most significant development in the financing options for the private equity industry over the last decade. These solutions have grown significantly over the last few years and we expect that growth to continue for the foreseeable future.
The desires of the private equity firms have been met by a growing industry of direct lending funds that welcome the opportunity to provide these flexible debt solutions to well-known, high performing private equity firms that have a proven track record of supporting their portfolio companies.
Hyzak: I think the relationship between private equity and asset-based lenders will always have a healthy existence, particularly in the types of asset heavy companies and industries that I mentioned earlier. In the near-term, I think there could be some additional opportunities for ABL in certain other industries as the trailing historical revenues and EBITDA in these industries continue to rebound and improve from the impacts of the pandemic.
Longer term, I believe you’ll continue to see the direct lending strategies take an increasing role in private equity transactions.
Dwayne Hyzak is CEO of Main Street Capital and a member of its board of directors. Previously, Hyzak served as president, COO, CFO and senior managing director. He served in other senior executive positions at Main Street since before its IPO in 2007. Beginning in 2002, Hyzak also served as a senior managing director and in other executive positions of several Main Street predecessor funds and entities, which are now subsidiaries of the company.
