Are senior-secured-loan joint ventures the next big thing in financing? With private equity firms making closing certainty a priority, lenders often need to demonstrate significant hold sizes to win deals. And for some lenders, including CIT Group Inc. (NYSE: CIT) and Ares Capital Corp. (Nasdaq: ARCC), pairing up can provide that assurance.
CIT is making its first move in the space by teaming up with TPG Special Situations Partners to form Strategic Credit Partners, a joint venture that will provide senior secured financing to companies in the communications, health care, information services and technology, industrial and restaurant sectors. CIT Asset Management LLC is the administrative agent.
The JV, which is majority-owned by TPG, will give CIT a larger hold size as the bank competes for transactions. “That is an important requirement of private equity sponsors, that their lead banks are committing to hold a substantial portion of the overall credit facility,” says James Hudak, president of CIT Corporate Finance, the CIT unit involved in the JV.
Ares Capital is also making more moves in the space. The group had teamed up twice with what is now Antares Capital for the Senior Secured Loan Program. But the program ended when Antares, formerly part of GE Capital Sponsor Finance, was sold to Canada Pension Plan Investment Board by General Electric (NYSE: GE) as part of GE’s back-to-industrial plan for $11 billion. Antares still makes unitranche loans, but not with Ares by its side.
Enter Varagon Capital Partners, Ares’ new senior-secured, middle market loan-making beau. The duo created a the Senior Direct Lending Program to underwrite and hold first-lien loans, including stretch senior and unitranche loans of up to $300 million, originated by both Ares and Varagon. The goal is to provide private equity firms with continued access to flexible capital without syndication requirements, which slow deals down with more parties, more time and more paperwork.
As lenders search for yield while facing heated competition for transactions in a low-interest-rate, high-deal-multiple environment, having a bigger hold size may in fact be the differentiating factor that brings all the private equity sponsors to the yard.