General Electric (NYSE: GE) is near finalizing a deal to sell its private equity-lending unit, GE Capital Sponsor Finance, to Canada Pension Plan Investment Board, according to reports.
Canada Pension is an investment group that manages the assets of the Canada Pension Plan. The group has C$264.6 billion (U.S. 212.7 billion) in assets under management.
GE Capital Sponsor Finance, which includes the coveted GE Antares unit, has been expected to sell first and quickly since GE CEO Jeffrey Immelt announced on April 10 that the company would sell GE Capital in order to shed the business’ Systemically Important Financial Institution status and focus more on its industrial businesses.
Other bidders for the unit reportedly include Apollo Global Management (NYSE: APO), Ares Management (NYSE: ARES), the Blackstone Group (NYSE: BX), Kohlberg Kravis Roberts & Co. LLP (NYSE: KKR), Japanese financial services company Mitsubishi UFJ Financial Group Inc. (NYSE: MTU), Atlanta, Georgia-based bank holding company SunTrust Banks Inc. (NYSE: STI) and Guggenheim Securities.
The deal looms as other units of GE Capital are also mid-sale process. GE reportedly hired investment banks to sell its health care, railcar and franchise finance units in early June, and a bidding process for $40 billion of GE Commercial Lending assets is underway. At an investor conference in New York on May 27, Keith Sherin, chief executive of GE Capital, said "customers won't do any business with us unless they know who the owner is. We have to get those done quickly."
The purchaser for GE Capital Sponsor Finance has long been expected to be an unregulated group because of regulatory hurdles that could pose problems for a bank buyer.
GE Capital is the largest lender in the middle market by a wide margin, making an estimated 25 percent of all loans made to companies with revenues between $25 million and $500 million. GE Capital has won Mergers & Acquisitions M&A Mid-Market Lender of the Year award twice first for 2010 and most recently for 2014.
Since Immelt announced the sale, all eyes in the middle market have been focused on GE Capital Sponsor Finance, which -- in addition to GE Antares -- includes TMT, GE Equity and the Bank Loan Group. The unit has long played a powerful role in middle-market dealmaking. For more on GE Antares and the current lending climate, read Mergers & Acquisitions' recent Q&A with GE Antares CEO David Brackett.
During the sale process, GE Capital has lost several executives. For example, middle-market lender Golub Capital hired Chip Cushman, previously a managing director at GE Antares. Houlihan Lokey hired Patrick Schoennagal, who was a senior vice president at GE Capital. Software company Splunk hired GE Capital's former chief technology officer, Snehal Antani, as CIO. GE has reportedly offered retention bonuses to some executives, and has required bidders who signed non-disclosure agreements to agree to not hire key employees until after a deal is closed.
Like many of today’s middle-market firms, GE Capital Sponsor Finance traces its roots back to Heller Financial, the Chicago-based finance firm that rose to prominence in the '80s and '90s by focusing exclusively on the middle market. Heller Financial was born in 1985, out of the phoenix's ashes of Walter E. Heller, which had been founded in 1919 and was acquired by Fuji Bank in 1984. Fuji poached a pair of executives from GE, Norm Blake and Bob Koe, to run the new firm, christened Heller Financial. Blake and Koe quickly changed the firm's focus from a leasing and asset-based commercial real estate lending company to a broader lending institution to serve the middle market -- which was becoming increasingly important to the private equity community as middle-market firms and divisions started to sprout.
Heller developed a culture of nurturing talent. In 1996, a dozen Heller executives, including Brackett, left to form their own firm, Antares Capital, which was backed by Mass Mutual Life Insurance Co. Both Heller and Antares thrived and became attractive targets in their own rights. GE Capital bought Heller in 2001 for $5.3 billion in cash. Then in 2005, GE Capital bought Antares. The Antares acquisition roughly doubled the size of GE Capital’s middle-market lending business at the time.
Today, GE Antares has about $14 billion in assets under management. It is considered the jewel in the crown of GE Capital Sponsor Finance.
Another unit considered attractive is GE Capital Asia, with Japanese financial services companies Mitsubishi UFJ and Sumitomo Mitsui Financial Group Inc. among expected bidders, according to the Wall Street Journal.
Overall, interest in the Commercial Lending division has been very high. Commercial Lending consists of six units: GE Capital Corporate Finance, GE Capital Sponsor Finance, GE Capital Franchise Finance, GE Capital Healthcare Finance, GE Capital Equipment Finance and GE Capital Commercial Distribution Finance. (See related graphic). Apollo, Blackstone, Mitsubishi, and Wells Fargo & Co. have reportedly considered bids for the whole Commercial Lending division.
Meanwhile, one piece of GE Capital outside the Commercial Lending division already has buyers, with Blackstone and Wells Fargo snatching up real estate operations for about $26.5 billion, in a deal announced April 10. GE has cited the successful initial public offering of its retail finance business, Synchrony Financial, as evidence that its financial services assets could be more valuable to others. The business model for large, wholesale-funded financial companies changed, making it harder to generate acceptable returns going forward, said GE. In March, the company said it would sell its Australia and New Zealand consumer lending operation as part of a plan to reduce GE Capital's overall share of GE earnings.
--Additional reporting by Mary Kathleen Flynn and Danielle Fugazy