Happy Friday and welcome to the latest edition of The Lower Middle Market. Before we jump into the good stuff, we’re excited to announce that we are making some changes to our newsletter which you get to see next week.

One interesting theme we came across this week is the recent expansion into private debt or lending to businesses by individuals, families, and non-bank institutions. This market has grown significantly since The Great Recession. According to Preqin, private debt reached more than $1 trillion in assets under management as of the end of 2020. This us up from about $145 billion in December 2006.

Although historically private lending has been through private equity or venture capital funds, more family offices are jumping into the lending game to serve small and medium-sized businesses. This provides a little extra yield for wealthy families in a low-interest-rate environment. Also, community banks are just now getting to opportunities that hit their plate a year ago! According to Jonathan Tunner of the Family Office Exchange (FOX), wealthy families can demand a premium rate because they can act quickly and are more flexible than conventional lenders. They can also be more opportunistic and creative when it comes to deal terms. According to FOX, 23% of families plan to allocate assets to this sector, up from 13% in 2019.

According to this Mergers & Acquisitions article, we’re starting to see a similar dynamic play out upmarket as more PE firms cut out banks to fund LBOs. With direct lending, private equity firms often receive more leverage with quicker financing. However, the potential pain for banks could be intense. The article goes on to state that one strategist estimates that direct lenders could snag as much as a tenth of the loan portion of that business in the coming months.

It’s been an interesting dynamic that is playing out. Part of the issue for banks has been the regulatory changes that took place after the financial crisis, which makes it more onerous for them to hold onto debt. Downmarket, insufficient access to federal Paycheck Protection Program dollars, helped create even more demand. Increased LBO and M&A activity offers another trigger. With a premium on speed and flexibility, we can expect this trend to only pick up speed. Especially, after we’ve seen investors show a ravenous appetite to participate.

This Week’s LMM Activity

Platform Partners-backed Dynamic Glass Completes Acquisition of Colorado Window Systems Link

Brixey & Meyer Capital acquires Georgia based Access Security Parking Integrated Solutions Link

Trademark Global and Bertram Capital acquire Bolton Furniture, an online seller of ready to assemble home and office furniture Link

City Capital Ventures acquires GreenTech Environmental, a leading designer and manufacturer of indoor air purification systems Link

HCAP Partners invests in Myndshft, a SaaS company focused on automating and simplifying healthcare administrative tasks Link

Ridgemont Equity Partners purchases utility service provider, Sparus Holdings, from Source Capital Link

Pharos Capital’s Charter Health Care Group acquires Generations Hospice Care Link

Pacific Lake Partners-backed West Fourth Partners acquires easy-to-use intranet software company, Axero Solutions Link

Pathfinder Companies take a majority stake in Jasper Engineering & Equipment Company Link

Mill Point Capital’s Spire Power Solutions acquires electrical power management and power distribution equipment company Link

Fairchild Capital announced Weco Manufacturing’s 3rd & 4th add-ons Link

Bow River Capital completes AbsenceSoft recap with Norwest Venture Partners Link

CORE Industrial Partners acquires precision sheet metal fabrication provider Link

On the Move

Keith Yamada and Dan Drexler join Performant Capital’s advisory board Link

Hunter Street Partners names former General Mills CIO and Treasurer Marie Pillai as Senior Advisor Link

Hidden Harbor Capital Partners expands team with four new hires Link

Other Stuff

What’s Fueling the M&A Wave in Government Technology? Link

An interview with Brent Beshore of Permanent Equity