[co-author: Carmelo Chimera]
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses approaches to alternative lending. It is authored by our colleagues Carmelo Chimera, Mark Kromkowski and Donald Ensing.
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Increased liquidity in financial markets has made the healthcare sector more attractive than ever to traditional lenders. But according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th, small to mid-sized lenders and debt-focused funds have greater flexibility with transaction structures that can involve debt, equity, or some combination thereof. This flexibility allows these lenders to remain competitive, increases the number of potential transactions, and provides creative client-centered lending solutions.
Experts included Neil Johnson, Managing Partner at Lawrence, Evans & Co, LLC; Dave Philipp, Managing Director at Crestline Investors, Inc.; Todd Roland, Principal at GCM Grosvenor; and Brian Yoon, Principal at Corbel Capital Partners. Donald Ensing, a partner at McGuireWoods LLP, moderated the panel.
Here are 6 key points from the panel discussion:
1. Increased liquidity in the marketplace has led to more traditional lenders entering the healthcare space because it is considered “safer” than areas like retail or energy, which can be volatile.
2. The healthcare market continues to grow along with scientific advancements in areas like anti-aging, health and wellness, behavioral health, substance abuse, and any area where tech-enabled solutions are innovating care.
3. Mezzanine loan structures with sponsor level support allow capital to reach portfolio companies that need it most despite being the least credit worthy.
4. Incorporating aspects of private equity into lending structures creates added value for clients, like long-term relationships in which lenders can be brought in at a pre-deal stage in anticipation of financing requirements.
5. Utilizing Small Business Investment Company (SBIC) leverage allows small to mid-size funds to deploy capital more quickly and easily.
6. EBITDA is a traditional screening method, but doesn’t capture everything relevant to making a lending determination, particularly with respect to free cash flow. EBITDA is especially unhelpful in cases with certain project-based or CapEx heavy businesses.
