Madison Capital: Meeting the lending needs of the middle market for fifteen years

By Adley Bowden

Adley Bowden, VP of Market Development and Analysis at PitchBook, talks middle-market activity with Hugh Wade, CEO and Christopher Taylor, Managing Director, Head of Relationship Management of Madison Capital

The heart of the middle market is made up of medium–size companies that are growing and looking toward an eventual IPO or sale to a strategic buyer. They are the engine of growth that drives our economy.

These companies need a steady source of capital for fuel that won’t dry up in tight credit markets, and a partner who will stick with them through credit cycles. This ability to stick with sponsors through thick and thin has made Madison Capital a true, long–term partner with relationships that last over many years through multiple transactions. Having access to steady capital makes it, in CEO Hugh Wade’s words, “a whole new ballgame.’

Madison Capital is always looking for better ways for their sponsor to access growth capital through innovation in deal structure. For example, they are on the vanguard of unitranche and senior stretch deals which help transactions become more streamlined and reach a higher certainty of close—an important element for sponsors as they compete for deals. For Madison Capital and its partners, hold sizes are swelling. A $150 million transaction requiring 10 participants in the past can now be covered in a club–like setting with two or three lenders. Madison Capital works with sponsors to provide the most innovative new deal structures in this area.

The middle market is one of the most dynamic areas of the economy and continues to experience a number of transformations. One of those has been the decline of middlemarket companies going public and instead opting to tap the private markets for liquidity and to fund their growth. This trend has greatly played to Madison’s strengths as the steady need for funding by these small and medium–sized companies that comprise the middle market and their PE sponsors has only grown. From traditional manufacturing and healthcare companies to high–tech companies increasingly accessing capital in traditional middle–market form, these companies seek capital to scale and reach the critical mass needed to be acquired by a strategic or achieve an IPO.

“The number of lenders that serve lower–middle–market private equity sponsors has grown tremendously,’ said Christopher Taylor, Managing Director and Head of Relationship Management at Madison Capital, “so it’s become a much more efficient, more competitive marketplace. This has been very good for Madison Capital, but requires us to be constantly rethinking how we do business, how we approach our sponsors and how we attack the market.’

Another new trend in the middle market is the increasing presence and growing impact of technology companies. For example, a popular storyline of late has been the dearth of tech IPOs, though less widely publicized has been the fact that PE–backed take–private transactions involving US tech companies have already equaled last year’s mark. So, while members of the tech industry aren’t particularly eager to enter the public markets, they sure seem happy to leave.

Smart lenders have taken notice and Madison Capital counts Software & Technology Services as one its core verticals, with a portfolio of around $400 million to $500 million after just 12 months in the space. When Madison Capital was founded 15 years ago, lending to software companies didn’t seem likely. To stay in the lead, Madison Capital has grown its balance sheet and third–party funds to over $8.05 billion in assets under management and now includes Healthcare, Insurance & Financial Services and the aforementioned Software & Technology Services as areas of proficiency.

On the flip side, fierce competition has turned securing deals into a grueling process, one that requires substantial resources to win both on the lending side and the equity side, even as regulations have largely driven traditional banks out of the industry.

For Madison Capital, a key differentiator is its backing by New York Life. The capital and extremely long time horizon (generational) that New York Life brings has allowed the Madison team to evaluate opportunities without dependency on fund lifecycles, or the fear that capital could run dry during a market downturn. The relationship Madison Capital has with New York Life is unique to the industry, particularly in the light of how the lender landscape has changed for sponsors and middle–market companies since the financial crisis.

Madison Capital CEO Hugh Wade relishes this competitive advantage. “They think in 50–year chunks of time,’ he said of New York Life. “They built Madison Capital to survive long after we’ve all gone and retired from the business. They have a long–term view of capital. They don’t come to us and say, ‘You need to grow 10% this year because our shareholders want us to grow 10%.’ They say, ‘What’s the market like? Should we grow this year? Should we shrink this year? Should we be more careful? Should we be more aggressive?’ They never come to us and tell us what to do with our balance sheet, which is spectacular.’

This means PE sponsors have uninterrupted access to capital that will be there when they need it. This is important now, as current economic growth still isn’t as strong as some would hope, and prospects heading into 2017 are largely uncertain due to forthcoming US elections and further Brexit fallout

“At the end of the day, we, Madison Capital, can provide the sponsor and the borrower uninterrupted capital throughout the life of the deal,’ managing director Chris Taylor said, “starting at close, all the way through exit. And they know, based on our 15–year track record, when we provide them a loan, we are going to support that loan every which way possible over the life of that deal. Their capital isn’t going anywhere... it’s very stable, it’s very patient, and it’s very flexible.’

“When you look at Madison’s product set, we have every option a sponsor could want, starting with senior, senior stretch, unitranche and then all the way through [mezzanine],’ Wade said.

That means a healthy supply of capital for small to medium–sized companies, according to Wade, often involving family–run businesses looking to transition to institutional ownership for the first time.

“The large–cap market can come and go, volumes can wane back and forth with economic cycles pretty dramatically,’ he said. “Whereas our market is steady, it’s high yielding, it’s predictable.’

And at the end of the day, working smart, innovating, and truly partnering with sponsors and companies to fuel their growth in the middle market is what it’s all about for Madison Capital.