Evolving M&A and Lending Markets: Reflections on the Banking Crisis and Advice for Business Owners

By Don Bravaldo, CPA, Andersen Alumnus and Founder of Bravaldo Capital Advisors

Reprint with the permission of Current Accounts, a publication of The Georgia Society of CPAs. This article represents the opinions of the author and is not necessarily those of The Georgia Society of CPAs.

On March 10, 2023, the California Department of Financial Protection & Innovation closed Silicon Valley Bank (SVB), jolting the financial community, disquieting markets and worrying depositors. Did the event constitute a true financial crisis? Was it a bank failure or a failure of bank management to anticipate and manage risk? I will leave the parsing, and there has been plenty, to the banking experts and financial historians. In this space, I reflect on the impact of the higher interest rate environment and the fallout of the events of last spring on M&A, private capital and lending markets. Although concerning, the three U.S. bank failures (including the closure of SVB, Signature Bank and First Republic Bank), the forced international merger of UBS and Credit Suisse and the resulting loss of confidence in the banking system are cause for vigilance, not alarm. Prompt, decisive action by U.S. regulators halted the slide, restoring relative market balance. “We’re not over bank failures,” offered Warren Buffet some weeks after the crash, “but depositors haven’t had a crisis. Banks go bust. But depositors aren’t going to be hurt.”


Since March 2022, the Federal Reserve has lifted short-term interest rates in 11 out of 12 meetings, marking the fastest course of monetary tightening in over four decades. Over the last 16 months, the federal fund's target range increased from 0.0 percent to 0.25 percent to its current target range of 5.25 percent to 5.5 percent. The pace of rate increases contributed markedly to the bank failures. So, too, did poor bank risk management, including an asset-liability mismatch between the lower-rate interest payments paid by borrowers and the higher-rate interest payments banks had to pay depositors. Add to that, in the case of SVB, the impact of a narrow base of depositors, with a small number of people representing very large deposits. Also to consider is the perennial question of “lag effects,” the delay of uncertain length before Fed interest rate moves affect the broader economy. Both public and private businesses are already feeling the pinch, including higher borrowing costs for deals. Heavily leveraged companies, those not locked into fixed-interest rate loans or hedged against rate hikes on their floating rate loans, are experiencing the greatest impact. According to Insight Weekly from S&P Global Market Intelligence, “U.S. companies are finding it ever more difficult to cover the cost of their debt repayments. Rising interest rates have pushed up borrowing costs for companies across the board.” From an M&A perspective, the impact is considerable. For example, a buyer who might previously have relied heavily on debt is likely structuring things differently today. Not only are debt-heavy leveraged buyouts (LBOs) more expensive—though still relatively cheap compared to the historically high rates of the 1980s—but the traditional banks have also mercilessly tightened lending policies. The same loan easily approved 18 months ago would face an uphill battle today. When this happens, traditional debt becomes unobtainable for many deal makers, and non-bank private debt funds step in to fill the void. As to the much-discussed recession question, the pairing of increased interest rates and tightening the money supply may lead to a mild recession. While a downturn seems less likely here in the South with our highly favorable business climate, many upper-middle market and mega-deal buyers are active nationally or globally. This makes them more vulnerable to the effects of a slowdown and the rising costs of borrowing for highly leveraged deals.


According to PitchBook, during the first half of 2023, global deal volumes decreased by approximately two percent, and deal values declined by about 10 percent compared to the second half of 2022. For transactions greater than US$1bn in deal value, the decline was 11 percent. The number of deals of US$1bn or more is down about 57 percent since the record M&A year of 2021. By contrast, those under US$1bn dropped by approximately 19 percent over the same period. It’s important to note that, for deal makers, Covid rendered 2021 a historical anomaly, with two years of activity compressed into a single year. Barring a dramatic turn of global and domestic M&A events, dealmaking in mid and lower-middle markets will drive total M&A activity for the remainder of 2023. Such transactions differ from the multi-billion-dollar Wall Street level deals often dependent on heavy borrowing in the high-yield debt market. Unfortunately, access to that market has faltered as investors shrug off such investments in favor of higher-yielding, safer U.S. treasuries. Another indicator of a Wall Street M&A slowdown is reflected in staff cuts at several Wall Street banks.


From my vantage point in the lower-middle market (transactions typically of $250 million or less), I am happy to report a still-vibrant market. Most corporate boards would be unlikely to stand in the way of a solid $50 or $100M transaction that is strategic and quickly accretive to earnings, regardless of the borrowing climate. Also of note is the wave of consolidation plays and add-on transactions initiated by lower and middle-market private equity (PE) funds. They are busily growing platform acquisitions via a buy-and-build strategy within highly fragmented industries traditionally served by small-to medium private, closely held or family-run businesses. The good news is that there remains a record amount of capital across market segments in search of the right deal. According to a data dispatch from S&P Capital IQ, “Global private equity dry powder soared to a record $2.49 trillion around the middle of 2023 as sluggish.”


deal-making limited opportunities for the deployment of uncommitted capital into buyouts and other investments.”

Other obstacles to deployment include an uncertain global economic outlook, higher transaction costs linked to interest rates and more regulatory scrutiny, especially in the U.S. Shortages of high-quality deals, the powerful drive to generate returns before the clock expires, and it is time to return capital to investors, has PE acquirers desperate to deploy, even as credit conditions are holding them back. The result is highly active lower- and mid-market deal-making. Another factor is the infusion of over-equitizing private equity capital into transactions, a relatively new development that makes sense in a “transitory” world of high-interest rates. PE funds are betting large equity stakes on their ability to source expensive nonbank debt to fund buy-and-build strategies. They seek scale to grow their valuation while waiting for a brighter day, i.e., a post-recession lending environment where platform companies can be recapitalized with less expensive bank debt as rates decline and underwriting standards soften. PE sales can now generate less debt without former owners worrying that their acquired businesses will fall into a ruinous debt spiral. With good businesses continuing to attract high-quality buyer interest (strategic and PE), private company valuations in the low-middle market remain historically strong, other than notable exceptions like tech.


Recent deal maker update calls with PE funds and BCA’s global M&A advisory partners provide valuable perspectives. A partner in a New York-based middle-market private equity fund reported finally seeing greater volume despite reduced asset quality. PE portfolio sales are down, and only event-driven deals are coming to market. However, the capital markets piece of the puzzle is different, with larger deals more affected by financing. Lenders are forming group syndicates to underwrite and fund transactions, and the bid/ask spread may be narrowing on financing for some deals. A partner at a Midwest lower middle-market PE fund suggests a slight increase in deal flow. M&A advisors, BCA among them, are seeing many new client pitches, with offered businesses coming in with only two grades, either A or D rated. Grade A business assets can take advantage of market scarcity and attract a premium, while low-quality Grade D companies must be sold and are likely to face a challenging time finding a suitable acquirer. This fund is experiencing a high level of add-on M&A activity, as is PE in general. Lending remains considerably easier to line up for add-ons, with banks providing credit synergies and counting additional collateral coverage on a combined basis. A U.K. partner in our international advisory firm network confirmed the effects of higher interest rates across the pond. “Deal times are stretching out, and buyers are signaling they are having difficulty obtaining financing,” I was told, despite the pound trading at nearly US$1.31, its highest level since 2022. Here at home, the fallout from the banking crisis and higher interest rates does not appear to be dampening business owners’ optimism. According to the recently released Bank of America Annual Mid-Sized Business Owner Report, 75 percent expect their revenue to increase in 2024. And 54 percent plan to apply for a bank loan or line of credit in the next 12 months, citing investment in new technology and equipment as leading reasons.


We enthusiastically support our private owners’ growth plans, never hesitating to recommend caution when indicated. With that in mind, I offer the following counsel to business owners who may or may not have

a sale in mind.

• Prepare for a mild U.S. recession near the end of 2023 or early in2024. If your business is located in the South or other high-growth regions, the recessionary impact could be minimal.

• Keep a close eye on inventory levels. Be especially vigilant if you serve individual consumers and your product is susceptible to discretionary spending. Many businesses that ramped up inventory levels in the wake of supply chain shortages may be caught with excessive product, a potential problem if a recession materializes.

• If you are a business owner anticipating the need for capital early next year, act now. Expect further credit tightening and potentially more rate hikes to come.

• Take time to assess depository relationships, including the quantity of deposits at a given financial institution and the need for multiple banking relationships.

• Review cash management practices with a focus on proactive strategies. For example, investing the company’s deposits in overnight treasury sweeps (where cash is transferred daily into a higher-interest investment) might not have mattered when interest rates were low. Today, however, it can be meaningful.

• Pay attention to accounts receivable and vendor payables to avoid becoming stretched if the economy does begin to tighten. Prioritize the management of optimal working capital.

• If you own a well-performing business, the timing for a professional sale process remains excellent, especially if your business is less likely to be affected by tougher economic conditions or a recession.

• Pursuing acquisitions, you have considered but not yet executed may turn out to be a timely strategy. Though this contrarian approach is not for everyone, it could pay surprising dividends.

The spring 2023 bank failures and contributing high-interest rate environment are not causes for panic but suggest increased awareness and vigilance. This holds for businesses seeking capital or looking to transact in the M&A market and for any private business owner leading through a period of uncertainty and promise. At Bravaldo Capital Advisors, www.bravaldocapitaladvisors.com, we are ready to support M&A clients in pursuing life-changing mergers and acquisitions in today’s inflation-driven market.

DON BRAVALDO, CPA, founded Bravaldo Capital Advisors in 2006 to provide full-service investment banking to middle-market clients, a segment underserved by larger advisory firms. As managing partner, Don has led BCA through successful transactions across a wide variety of industries. Prior to founding Bravaldo Capital Advisors, Don led the middle market group at a Southeastern M&A advisory firm and oversaw all North American mergers and acquisition activity for Hanger Orthopedic Group, Inc. Earlier in his career as an auditor with Bennett Thrasher & Co., PC and Arthur Andersen LLP, Don coordinated financial reporting engagements and provided business consulting services to clients throughout the Southeast in industries including construction, service, manufacturing and health care.