Interest in investing in the middle market is heating up, prompting lenders to increase their hold sizes. Thanks to managed accounts, a handful of middle-market lenders are able to speak for larger hold positions through a combination of their own balance sheets and managed accounts, creating an environment that requires fewer lenders to complete a deal.
Pension funds, endowments, sovereign wealth funds and family offices have large amounts of capital that they want to invest in middle-market loans, according to Jeffrey Day from Madison Capital.
For example, a pension fund may have seen the benefit of investing in the middle market before, but had no access. Now, the fund could give a lender a certain amount of capital to manage on their behalf, and the lender would make a management fee, according to Heath Fuller from NXT Capital.
"The trend towards managed accounts started when lead origination firms started taking larger hold positions as third-party-investors were looking for a way to plug in to the middle market without setting up direct origination platforms," says Chris Williams (pictured) of Madison Capital.
Investment banks like the trend because it requires fewer lenders and provides more certainty for their clients, Williams says.
Sponsors can then club up a transaction between two or three lenders with large hold sizes to complete a deal, according to Day. More lenders were needed when the hold sizes were smaller.
"It's had a very dramatic impact on our market overall for deals that would have been syndicated," says NXT's Fuller.
Those lenders that call on agents to get involved in a deal may be left out of the transactions that sponsors are clubbing up themselves, according to Day.
Those lenders still have a place in the market, but it's not in a lead agent position, according to John Martin from GE Antares.
"There is still a viable place for them, particularly if they have been a consistent, long-term player in the space," Martin says.
Lenders without a direct sponsor origination platform can be pushed out of the lower middle market and into the upper middle or broadly syndicated market, Day says.
"Some sponsors value the increased certainty that this provides them, but in highly liquid markets, such as those that we have been experiencing recently, this likely provides less value than it would in a more volatile market," says Martin.