Lender Education: An Alternative Approach

Craig Cheetham, Founder & Director, Fellwood Advisory

Background

When considering the scope of a sell-side engagement, especially when the target buyer pool involves private equity, the ‘lender education’ process has become firmly established.

Lender education offers many benefits to all stakeholders involved in a lender education process, such as:

• Providing bidders with specific appetite from debt providers for them to model returns, place valuations on a business and determine their optimal funding structure

• Giving vendors a greater level of certainty debt appetite exists to support offers

• Speeding up the overall process, as lenders are involved from an early stage

• Lenders gain an early insight into the process and it ensures they see all of the deals relevant to their position in the market

With a continually fragmenting debt market, corporate finance firms have recognised the benefit of investing in their own debt advisory teams to manage this process, thereby covering the right lenders and obtaining insightful feedback that potential buyers need.

The Problem

When firms are invited to pitch for a sell-side opportunity there is a lot of effort spent on getting their proposal fit for purpose. With the market being so competitive, firms need to ensure their offering is the most appealing in order to secure the engagement, which includes sector knowledge, depth of team, prior relationships and other angles, but also price.

Debt advisory teams have fee targets, just like the corporate finance teams do. They need to ensure their teams are working on remunerative projects that help them achieve their goals.

In a sell-side proposal this often manifests in one of two ways:

1. One scope and fee proposal is presented to the potential client and the lender education fee is built in (a separate ‘fee share’ between the two departments is agreed in the background) or

2. The scope and fees are presented separately; one for the M&A process and the other for the lender education process

Either way, pressure to secure the overall sell-side engagement means that the lender education process is often diluted down to ensure the fees are kept low. The more diluted the scope, the less insightful the feedback, which then detracts from the benefits mentioned above.

Lender education processes can sometimes pose an additional problem for firms. In a lender education process, the engagement is with the vendor. This means that if a buyer wants to engage with that firm at a later date to raise the debt for them, this can cause a conflict of interest, meaning they could be precluded from acting in a buyside capacity, where fees are often higher. 

The  Solution

As a pure-play, fully independent debt advisory practice, Fellwood Advisory can work alongside M&A teams to deliver a full-scope sell-side offering, without the worry of fee sharing. Furthermore, due to the structure of Fellwood, the lender education process can be delivered in a cost-effective manner without compromising on the quality of the process.

Fellwood have significant experience in leading lender education processes alongside M&A teams across a range of transactions from £5m - £100m of debt including banks, direct lenders and asset-based lenders.

Having Fellwood provide this service has the added benefit of keeping in-house debt advisors free to engage on a buy-side free of any potential conflicts.

Conclusion

The scenarios in this article are not always relevant, but often are in one or more ways.

If any of these scenarios do resonate with your particular circumstances, please do get in touch to discuss how Fellwood can support you.