A Practical Guide to Mergers & Acquisitions in Private Lending

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The private lending industry has not seen its fair share of consolidation via mergers and acquisitions (“M&A”).

Although there have been newsworthy acquisitions over the past five years, it is not a commonplace strategy. I believe this is because most private lending companies are small businesses, meaning they are owned and managed by entrepreneurs. This results in an almost existential conflict between financial opportunities and working for oneself.

However, with standardization, commoditization, and institutional capital flooding the current private lending marketplace, being acquired or merging with another private lender or institutional investor has become an increasingly popular topic and frequent occurrence.

This article will discuss some key considerations to priming your business for a successful merger or acquisition.

Mergers and Acquisitions: Necessary Components and Considerations

Many private lenders overlook the necessary components to a successful merger or acquisition. Although a high volume of loan origination is an essential component for any successful merger or acquisition of a private lending business, it’s not the only piece. Many of these are key components to a valuable private lending business, such as:

  1. Loan processing
  2. Asset management skills
  3. Loan servicing skills
  4. Construction draw management skills
  5. Borrower relationship management
  6. Marketing skills
  7. Investor relations capability

Another practical consideration is to ensure you are building your business with the acquiring party in mind. A common thread in successful mergers or acquisitions in private lending has been that companies that build out a robust and fully capable private lending operation beyond loan origination is more likely to be acquired at a healthy valuation. What does this mean specifically?

It has long been recommended that a private lending business incorporate a balance sheet strategy to their business model. This is challenging considering how much institutional capital is available today. The rationale for this recommendation is that private lenders will demonstrate the ability to underwrite loans thoughtfully as opposed to simply conforming to an institutional investor’s credit matrix. It also demonstrates the significant value in managing assets, servicing loans, and shepherding troubled assets through delinquency to foreclosure.

Mergers & Acquisitions: Intangible Components and Considerations

Other key components are intangibles such as the compatibility of the partners, organizational culture, and vision for the future. In the specific context of a merger – it is immensely important that the principals and key executives joining forces not only have a functional working relationship but also share the same business ethics and values. We have seen many mergers fail simply because this was overlooked. It can be one particular partner that causes strife, or it can be both sides. One common reason these considerations are overlooked is the concentration on the deal points. The economic and financial opportunities can create blinders for the parties involved, creating a singular focus to get the merger completed.

In the specific context of an acquisition, the circumstances vary. The most common instance is a larger company or institution acquiring a smaller company. This often results in the target company’s principals and key executives remaining as part of the company. This is where the intangibles become especially important. Many private lenders come from an entrepreneurial background and must be able to accept becoming an employee or key executive of a much larger organization. This may come with a significant change in oversight, expectations, and freedom. Both sides must consider this key component alongside the various financial and economic opportunities presented.

In recent years, consolidation through M&A has become a heavily discussed topic in private lending. It is immensely important that private lenders consider the practical preparations and components necessary to a successful M&A deal. Loan origination volume is simply not enough to make a private lending business an attractive acquisition target. Finally, intangible considerations such as fit, vision, and culture are immensely important.

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