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Mid-market Businesses Review Relationships in the Wake of Banking Turmoil

The demise of several banks in the spring has led some smaller businesses to reassess risk, deposits and lending relationships

Mid-market Businesses Review Relationships in the Wake of Banking Turmoil

The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank this spring were some of the biggest hits to the banking ecosystem since the 2008 financial crisis.

In the weeks following those failures and subsequent shocks to the banking system, middle-market companies and investors were monitoring exposure, watching out for potential aftershocks and discussing a way forward. Now that the dust has settled, middle-market and small companies are keeping a close eye on cash deposits, building or diversifying relationships with banks and seeking alternative financing methods amid tightening bank credit.

This section of the report originally appeared in the Summer 2023 edition of Middle Market Executive.

Illustration by Dan Page

George Elston, chief financial officer at EyePoint Pharmaceuticals, a client of SVB in Watertown, Massachusetts, says the bank’s collapse was a warning to small and mid-market companies.

“SVB was a wake-up call to smaller firms and their management of cash in operating, savings or asset-management accounts,” he says. “Traditionally, a simple calculation of cost [versus] benefit for cash allocation was enough, but now liquidity risk needs to be a meaningful factor in where cash resides.”

Mitigating Risk

SVB was a wake-up call to smaller firms and their management of cash in operating, savings or asset-management accounts.

George Elston

EyePoint Pharmaceuticals

The collapse of SVB came as a surprise to middle-market firms, says Brad Haller, a senior partner in Mergers & Acquisitions at West Monroe in Chicago, who says he had not heard of companies expressing concerns previously about the stability of their deposits in regional banks.

As one of SVB’s clients, EyePoint has been weathering the storm. It holds $144 million in cash in U.S. bank accounts. All of its operating accounts were at SVB, and it has $40 million in debt with the bank. EyePoint’s debt agreement requires that the company use SVB for its commercial banking and asset-management services.

EyePoint’s reaction to the SVB collapse was to put “immediate focus on ensuring continuing our business operations uninterrupted and identifying/mitigating any cash at risk,” Elston says.

The collapse also changed the company’s cash strategy. For anticipated deposit/operating accounts, Elston says, “we have established a relationship with an alternative commercial bank while maintaining compliance with our loan covenants.”

Just as EyePoint has done, Haller believes it will be crucial for middle-market and small companies to forge new deposit and lending arrangements. “They will need to develop more relationships with banks, but it takes time and effort to build them,” he says.

Reviewing Small Business Lending

Jeffrey Stevenson, managing partner at VSS Capital Partners, a lower mid-market structured capital provider, calls the bank collapses a “significant disruption to lower middle-market lending.”

“Regional banks have pulled back and, in some cases, have put a hold on new customers or, at the very least, have lowered their leverage levels and tightened their covenants,” he says. “It’s a big dynamic in the marketplace right now because small companies have [traditionally] been financed through the regional banking system.”

Related content: After SVB: How the Banking Sector Is Impacting M&A

U.S. regulators in March took control of SVB, which catered to technology, private equity and venture capital firms, and announced the federal government would guarantee deposits following the bank’s collapse, which was the largest bank failure since Washington Mutual in 2008.

Days later, state regulators in New York seized control of Signature Bank, which had counted private equity as a significant part of its lending business. In late April, federal regulators took control of First Republic Bank and made a deal to sell most of its operations to JPMorgan Chase.

As the fallout continues, Haller predicts that middle-market businesses will be warier of using small, regional banks for their financing needs. “They will be using private debt/credit facilities, which have seen a material increase in fundraising and capital deployment over the last 18 months,” Haller says.

VSS’ Stevenson also expects that regional banks will be more cautious about lending and that the costs will increase. “In general, there has been a tightening of credit across the board, particularly for some small regional banks that have pulled back as they’ve had flights of deposits,” Stevenson says. “Their credit committees have pulled back and become more conservative.”

Biz2Credit’s Small Business Lending Index showed that loan approval rates at big banks dropped from 14.2% in February to 13.8% in March, which was the lowest figure for big banks since July 2021. Small business owners also found it challenging to find funding from small banks. Approval rates of business loan applications decreased from 21.3% in February to 19.1% in March.

“In many cases, we are finding that regional banks are focusing on existing relationships and not taking on new relationships,” Stevenson says. “It’s really having a widespread impact on lower middle-market firms in terms of their ways to finance acquisitions.”

To ensure that portfolio companies have solid banking relationships, Stevenson says his firm serves as a fiduciary on their boards and evaluates those connections. “We are interested in diversification and not having exposure to banks that are potentially at risk. We advise companies in that regard,” he says.

Related content: Banking’s Reckoning Presents a Dilemma—and Opportunity—to Middle-Market Private Equity

As an example of the recent difficulty of securing financing, he cites a lower mid-market healthcare services company VSS is working with that turned to other financing methods after it was unable to secure loans from a bank or direct lender to complete an acquisition.

“VSS was able to come up with a [structured capital] solution to enable the acquisition to go forward,” Stevenson says. “We are providing junior capital in the form of debt and equity.”


Stevenson foresees that an inability to arrange financing will have a chilling effect on deals. “In some cases, it will cause deals not to get done altogether,” Stevenson says.

“It will require creative financing solutions and, in other cases, will require a change in valuations in order to fit into what’s available for financing.”

Haller agrees that companies will need to reconsider valuations. “Sellers are still expecting a valuation that someone told them they were worth in 2021, but that’s no longer the case,” he says.

Although Haller says marketplace participants “have tried to go back to normal with lessons learned,” he believes the biggest result of the regional banking crisis will be increased federal regulations.

The bottom line, according to Haller and Stevenson, is that the regional bank collapses have made credit harder to come by and more expensive. That dilemma is not helped by rising interest rates. Looking to the future, Haller hopes the dealmaking environment will improve with no more bank collapses and a stabilization of interest rates.

“I am cautiously optimistic for the future,” he says. “It has been a slow six months in the PE investment space. I am hoping for interest rate stabilization. They don’t need to fall. They just need to stop increasing.”


Annemarie Mannion is a former reporter for the Chicago Tribune and a freelance writer who covers business.


Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.