Acquisitions / Business development / Economics / Resources

M&A activity picked up in Q4 2020. It drove demand for commercial financing as credit markets thawed

Baltimore fintech company Cerebro Capital offers a look at indicators that show commercial lending activity is picking back up after the initial pandemic slowdown. Mergers and acquisitions played a role.

With many parts of the economy still struggling amid the COVID-19 pandemic and an uneven recovery expected, it’s worth paying attention to the signs that point to activity picking back up.

Baltimore-based fintech company Cerebro Capital spotted one such indicator in a review of lending data for the fourth quarter of 2020: Rising numbers of banks and non-bank lenders saw an easing of credit standards for loans or credit provided for other businesses. These standards are the set of criteria a lender uses to determine whether an applicant should receive the funding they request.

Cerebro, which offers a platform for corporate lending in the middle market that has data from more than 800 lenders, surveyed non-bank lenders in its network, which include venture debt lenders and business development companies. It also analyzed the Federal Reserve’s quarterly survey of commercial banks. It found that 20% of responding non-bank lenders said that terms for a loan from their firm were better in Q4, as compared to 6% the prior quarter. Of commercial banks that responded to the Federal Reserve’s quarterly survey, 12% saw better terms, as opposed to 3% in Q3.

While many of the respondents still saw no change over the final three months of the year, Cerebro thought the uptick in easing standards was worth pointing out. The non-bank lenders who saw easing standards cited “a more favorable economic outlook along with an increased tolerance for risk” as their top reasons, per Cerebro’s report. It pointed to an overall improvement in the credit markets.

“Borrowers seeking new loans in [the fourth quarter] have the benefit of two quarters of history through the pandemic, which allowed them to generate more accurate forecasts for 2021,” said Allan Smallwood, senior director of capital markets for Cerebro Capital, in a statement. “Additionally, the FDA approval of vaccines in Q4 helped lenders have more confidence in improving economic conditions.”

The first and biggest driver is the pent-up demand from acquisitions that were put on hold in Q2 and Q3, while sellers and buyers paused acquisition activity to assess the economy, vaccines, and the overall economic situation.

So what were they looking to do with the money? There was notable funding being sought to help companies combine, or buy others: More than 70% of respondents from both surveys said merger and acquisition activity drove the demand for the new financing being sought in the quarter.

M&A activity is often closely watched, given both the interest that comes from firms joining together or gaining new ownership, as well as the potential for those who exit in a deal to make returns. And this kind of activity is the “lifeblood” of the middle market, which is defined as the firms in the $10 million to $1 billion revenue range.

So what’s driving the demand for loans now? Like most things in 2020-2021, the pandemic governs all.

In a time of economic uncertainty like the pandemic, it’s typical that M&A activity doesn’t go away completely. Private equity firms that are often behind such deals have available resources, Cerebro Capital CEO Matthew Bjonerud told However, the shock delivered by the pandemic meant that there was a pullback in this form of activity, just as there was across the economy. In Q4 and early 2021, activity is picking back up, he said.

“The first and biggest driver is the pent-up demand from acquisitions that were put on hold in Q2 and Q3, while sellers and buyers paused acquisition activity to assess the economy, vaccines, and the overall economic situation,” Bjonerud said.

Typically the sponsors of deals are investing out of funds that have committed capital, which must be deployed over a certain time period. So the slowdown over six to nine months due to the pandemic as sellers and buyers assessed the changed market and encountered frozen credit markets amounted to a lot of lost time.

“Now they are scrambling to deploy that capital or risk losing it, which would then make it harder to raise new capital again,” Bjonerud said. (Venture capital investing is similarly cyclical, though that sector’s pullback lasted only a couple weeks.)

Bjonerud added that in Q4, there was specifically M&A activity in industries that were particularly impacted by the pandemic, like travel, fitness and transportation.

“In those instances there were some M&A activity driven by opportunistic buying from distressed companies, but it was not the primary driver of M&A that we saw coming through our middle market borrowers,” he said.

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