When we first began distributing middle market loans (in the waning days of the Reagan Administration), the concept was novel. Back then money-center banks underwrote and syndicated mainly large corporate loans to other relationship banks. Smaller deals were mostly self-arranged, club affairs among regional banks and finance companies.

Ironically the world of middle market loan underwriting today remains a clubby business. But thanks to the regulatory climate, the members of the club have changed. Banks are being pushed further to the sidelines. In their place are specialized funds, BDCs, and other non-regulated credit providers. Rather than investing in only senior debt and having the private equity sponsor source the junior capital, arrangers are speaking for all the debt.

Traditional deal size barriers have also been redefined. Until recently, loan distribution of tranches over $250 million were the purview of bank syndication teams. Buyers were almost all institutional funds. Now the scale of the top middle market firms allows for club deals of $250 million and higher, with each participant taking increasingly higher shares.

Private equity sponsors have always played active roles in lender selection. This has been heightened for a number of reasons. First, the increasingly competitive nature of auctions has forced buyers to accelerate the bidding process. Relationship lenders are pre-selected to afford efficient negotiation of terms and expedited closings.