When my career at Lancaster Pollard began 15 years ago, the capital markets were quite different than they are today.
Our firm helps health care, senior living and housing providers expand and improve their services by delivering capital financing solutions and financial advice. In those pre-recession days, variable-rate demand bonds and letters of credit were popular debt financing options for a lot of our clients.
The Great Recession was very disruptive to these structures, as the lack of liquidity in the market made it impossible to “remarket” or “auction” these bonds, forcing bankers to buy the bonds directly.
Changes in the capital market
During a major economic downturn such as that, many banks and virtually all bond insurers were downgraded, and bank letters of credit became more limited. It became more challenging for businesses to find cost-effective and term-favorable funding solutions.
In such risk-averse markets, government agency programs, like Federal Housing Administration mortgage insurance, become particularly compelling.
In the years that followed, interest rates, although already low, dropped to historic lows and have largely stayed there. As such, the mindset shifted to more of a long-term approach, leading to more permanent debt financing structures with terms up to 40 years.
Bank activity also started to pick up, as they worked to re-establish their capital and liquidity positions after shedding the riskier assets from their balance sheets. As a result of Dodd-Frank legislation, however, the banks appear to be more restrained and disciplined in their lending.
Outlook on the present, future
During the last several years, our clients have taken advantage of the low interest rates to position themselves for the long term. This included not only instituting long-term debt structures, but also obtaining funds to renovate, rehabilitate, construct and reposition their real estate assets.
We have seen clients, including many here in Columbus, go from strong to stronger in recent years due to the favorable capital-raising environment.
In addition, this has fueled a significant amount of M&A activity, leading to record setting volume.
Within senior living, our primary sector, the growth over the last 15 years has been remarkable. It went from approximately 50 transactions in 2000 to approximately 100 in 2010 to more than 350 in 2015, which was a new record. This has been fueled by low interest rates, rising property values and ready access to debt and equity capital.
In addition, due to the changes in the operational complexity of the senior living sector, there is further drive to consolidate and create scale.
What we’re seeing currently is an increase in the smaller deals, as a lot of the billion-dollar deals have already been completed. As such, even though the rapid M&A pace of the past year likely can’t be sustained, we expect that the capital raising and M&A environment will remain favorable and active going forward.
Nick Gesue is the CEO of Lancaster Pollard, which helps health care, senior living and housing organizations expand and improve their services by providing financial advice and financing solutions. Over the last decade, Nick was instrumental in the development of Lancaster Pollard’s mortgage lending platform. In his previous tenure as the chief credit officer, he played a key role in implementing the firm’s private equity fund and balance sheet lending operations. His accomplishments include successfully underwriting more than 350 transactions totaling more than $3 billion in loan volume.
