River Associates: Consider Local Banks For Financing

In a tough financing environment for buyout firms, one small fund manager is offering some advice: try the locals. River Associates Investments LLC, a lower mid-market shop in Chattanooga, Tenn., has routinely financed deals with area banks in its 18-year history.

Banks that River Associates has worked with include the Bank of Albuquerque, M&T Bank in the Mid-Atlantic, Old National Bank in Indiana, and Wachovia SouthTrust in the Southeast.

“The typical inclination is to pick up the phone and call the national corporate finance lenders,” Mark Jones, a partner, told Buyouts. “We do that too, but just as a check to see what the market might hold, we always make a point to talk to local lenders.”

Lower mid-market buyout shop The Riverside Company has also used local banks sporadically, and is looking to work with them more often with its micro-cap fund, according to a spokesman for the firm.

There are factors to consider, Jones said, when going this route. Ideally, the bank will have a history of financing leveraged buyouts. Sometimes local banks with little to no history of financing this kind of transaction over-promise in their willingness to land the deal. That can lead to problems later on.

“The key is to talk to lenders and understand their attitude, know how they’ll handle breaches of covenants, [find out] if they’ll run for cover at the first sign of a downturn,” Jones said. “You just have to vet the lenders pretty well.”

River Associates has relationships with some local banks going back several years that can give it an advantage in deals against competitors from out of town. “To the extent that the seller [and] the management team feel more comfortable having a local lender, it may give them a little more comfort,” he said.

To be sure, River Associates is speaking with well known, national players—such as Wells Fargo—for the deals it’s working on, Jones said, but the firm always looks into options with local banks as well. The firm, investing from its $110 million River V LP, has a specialty apparel business and an outsourcing services company under of letter of intent, and it’s pursuing a couple of add-on deals for existing portfolio companies.

Buyout shops have also turned to local banks abroad for international deals. Turkiye Garanti Bankasi, for example, helped finance BC Partners’s $3.3 billion takeover in March of Migros Turk, the largest supermarket chain in Turkey.