Private equity firms are looking for more than just a good price from their lenders.
Asked what is "extremely important" when choosing a lender, a whopping 98% of those responding to a recent survey by Investment Intelligence Group, a Chicago-based consultancy, cited "flexibility."
Ninety-five percent cited "quick decision-making," "in-tegrity," and "professional lending officers."
But only 43% of the 42 respondent firms cited "lowest rates."
The most obvious factors, such as pricing, "are not necessarily the most important," said Al Rabin, Investment Intelligence's chairman.
Also ahead of price was "extensive capital resources;" 48%of respondents said this is extremely important.
Private equity investors said their lending needs have changed as competition for deals has intensified. Corporations with high stock prices have entered the merger fray, and a raft of new pension funds, insurance companies, and banks have entered the private equity market.
"There are plenty of opportunities, but plenty of competition too," said Peter Brockway, a partner with Miami-based Trivest Partners.
On average, return on equity invested over the past two years was 46%, well ahead of the targeted return of 35.6%, the survey found.
As the environment has become more competitive, the intangible qualities of a lender count the most to many equity firms. "We don't look for the last basis point; what we want is a dependable deal," Mr. Brockway said.
Marcus Wedner of Continental Illinois Venture Capital, a unit of BankAmerica Corp., agreed that the private equity scene has changed.
"Pricing of bank credit was much more of an important component to the overall package, but these days, the value is in getting a lender who is flexible and understands the business," Mr. Wedner said.
One-stop financing has also become a factor. About one-third of the survey's respondents said one-stop financing or deep structuring was a feature they looked for in a lender.
"It has been a total plus for us," said Michael J. Kluger, a managing director and founding partner with New York-based Liberty Partners. "When a deal pops up and we need both advice and capital, now we can go to one place.
Mr. Kluger added that a bank's commitment to hold the loan is also important.
"What happens if something goes bump in the night?" he asked. "We're not likely to kill someone over the last 25 basis points," he said, but will favor lenders that value the relationship as much after the transaction is closed.
Some investors expressed frustration with banks' desire to win all parts of a financing structure.
"We just want to take it one step at a time, and not preclude the other banks from bringing us ideas," said one private equity investor. "We don't want them to have such a bear hug, because it could curtail idea flow."
The study showed that nonfinancial due diligence has also become more important to private equity firms.
"With pricing getting the way that it is, and the need to be able to build the company after the transaction is completed, more and more buyout firms are outsourcing their nonfinancial due diligence," Mr. Rabin said.
"It is a way of reducing overall risk," he said. "In many instances it's even more important than the financial due diligence."