Why M&A Lending is Moving to Non-Bank Lenders

Introduction

Non-bank lenders are aggressively capturing market share in the M&A world. In 2025, private equity transactions accounted for an estimated 30%-40% of global M&A deal value and approximately 55% in the Americas (predominantly the U.S.), according to PitchBook, which measures private equity participation based on announced transaction value.

(There is less available data on the breakdown of private equity transactions by deal count; the number of deals as opposed to dollar value. But it is likely to be an even larger share, as data availability is generally poor for transactions of less than $100MM of enterprise value.)

Private equity typically uses third-party debt to fund a leveraged buyout, borrowing against the business’s cash flow and contributing equity to acquire the business from its sellers. Estimates suggest that 60%-80% of private transactions are financed by non-bank lenders, commonly referred to as private credit.

Like private equity funds, private credit providers raise capital from institutions, pension funds, insurance companies, wealthy individuals, and other sources. This is the opposite of banks, who take short-term deposits from savers and convert them into loans. Banks hold a portion of any loan they make on their balance sheets and syndicate the rest; this is essentially a sale to investors or to another bank that will hold some of the loan on its balance sheet.

The Rise of Non-Bank Lenders in M&A Transactions

The private credit ecosystem now encompasses direct lending funds sponsored by alternative asset managers, business development companies (BDCs), credit-focused hedge funds, and specialty finance companies. Industry growth has been extraordinary: private credit AUM has expanded at double-digit growth rates throughout the past decade, exceeding $1.5 trillion globally by 2024.

The business model of non-bank lenders differs fundamentally from traditional bank lending. Non-bank lenders employ an “originate-to-hold” strategy, retaining loans through maturity rather than syndicating exposure. This approach aligns lender and borrower incentives around long-term performance and enables highly customized capital structures. Critically, these institutions operate outside bank regulatory frameworks, thereby providing structural flexibility that enables higher leverage multiples and more accommodative terms than regulated bank competitors.

Business development companies (BDCs) are publicly traded vehicles in the private credit ecosystem that provide permanent capital for middle-market lending. BDCs benefit from regulated investment company (RIC) tax treatment, which allows them to avoid corporate-level taxation by distributing at least 90% of their taxable income to shareholders. This “pass-through” structure makes BDCs highly efficient yield-generating vehicles for income-oriented investors.

Advantages of Non-Bank Financing for M&A

Non-bank lenders offer several compelling advantages over bank lenders that have driven borrowers toward these alternatives:

• Certainty of execution represents the most valued attribute in competitive M&A processes. Non-bank lenders typically provide fully committed, single-source financing without syndication requirements. This “one-stop” approach eliminates syndication risk and market flex provisions that characterize bank commitments. In competitive auctions, particularly sponsor-to-sponsor sales, financing certainty frequently determines winning bids, making direct lender commitments strategically advantageous despite higher pricing.
• Execution velocity provides a significant competitive advantage. Leading direct lenders can deliver committed term sheets within 3-5 business days and execute from commitment to close in 3-4 weeks. Streamlined investment committee structures, typically 3-5 senior credit professionals with full decision authority, enable rapid underwriting and documentation. This speed-to-market materially exceeds bank timelines and proves decisive in time-sensitive or pre-emptive acquisition opportunities.
• Structural flexibility enables customized solutions aligned with specific transaction dynamics. Non-bank lenders routinely offer unitranche facilities, combining senior and subordinated tranches into a single instrument, thereby simplifying capital structures and reducing intercreditor complexity. Additional structural accommodations include PIK toggle features, covenant-lite or maintenance-lite frameworks, delayed draw term loans for earn-outs or capex, and customized amortization profiles. This flexibility is particularly valuable for transactions involving complex integration plans, seasonal cash-flow patterns, or growth-investment requirements.
• Leverage capacity enables buyers to compete effectively at prevailing market valuations. Non-bank lenders often (though not always) have the flexibility to be more aggressive than many banks in their debt-to-EBITDA ratios. This incremental debt capacity, often 1.0x-2.0x EBITDA of additional financing, can prove essential for winning competitive processes, particularly in sectors trading at elevated valuation multiples.
• Relationship continuity is a defining feature of the direct lending model. Because these lenders retain exposure through maturity, they function as true capital partners rather than transactional intermediaries. This alignment often translates to more constructive amendment negotiations, proactive support during operational challenges, and streamlined execution of follow-on financings for add-on acquisitions or growth capital. Leading direct lenders maintain dedicated portfolio management teams focused on maximizing portfolio company performance throughout the hold period.

Challenges and Considerations with Non-Bank Lenders

Despite these advantages, non-bank financing presents trade-offs that borrowers must consider:

• Higher cost of capital represents the primary trade-off. Non-bank lenders typically price 200-400 basis points more expensive than comparable bank facilities, reflecting their higher cost of funds. For transactions targeting specific IRR thresholds, this pricing differential materially impacts returns and may influence valuation ceilings.
• Documentation lacks standardization relative to traditional bank loan syndications. While flexibility enables customization, the bespoke nature of direct lending documentation requires careful negotiation of definitions, covenants, events of default, and intercreditor provisions. Borrowers cannot rely on “market standard” assumptions and may be required to dedicate meaningful legal resources to documentation review and negotiation.
• Prepayment provisions warrant careful analysis. Non-bank facilities typically include prepayment premiums (often 2-3%, declining over time) or make-whole provisions that protect lenders against reinvestment risk. These features can create high costs, potentially millions of dollars on large facilities, if borrowers seek to refinance opportunistically or exit through M&A before the make-whole provision expires. Negotiating prepayment flexibility during initial documentation proves far easier than seeking amendments later.
• Covenant frameworks require detailed analysis. While covenant-lite structures have penetrated the large-cap market, middle-market direct lending facilities typically include financial maintenance covenants, most commonly senior secured leverage and fixed charge coverage ratios tested quarterly. Although often more accommodative than traditional bank covenants (with wider cushions and more favorable definitions), these covenants still require ongoing compliance monitoring and can trigger defaults due to operational underperformance.

The “New Normal”

The migration of acquisition lending from banks to non-bank lenders appears to represent a permanent structural shift, although that remains unclear. Recently, there has been some indication that investors are seeking exits from private credit funds due to concerns about credit quality and declining yields as interest rates fall. Direct lenders seem to have established sustainable competitive advantages in execution certainty, structural flexibility, and leverage capacity that banks may find difficult to replicate within existing regulatory constraints.

Corporate acquirers also use non-bank lenders to finance acquisitions. However, corporate acquirers generally have long-established banking relationships and access to bond markets, and they often do not meaningfully leverage their businesses in the transaction. Therefore, they tend to rely more on traditional (and less expensive) bank lending.  Private equity drives considerable transaction activity in the middle market, and most of these funds rely on non-bank lenders.