The buyer of GE Capital Sponsor Finance is “more and more looking like a non-regulated entity," a source inside General Electric (NYSE: GE) tells Mergers & Acquisitions. The same regulatory hurdles that prompted the sale will likely deter bank buyers.
GE CEO Jeffrey Immelt announced on April 10 that the company would divest GE Capital to refocus on its industrial businesses and to aid in shedding its status as a Systematically Important Financial Institution. Sources have predicted that the Sponsor Finance unit, which makes loans to private equity-backed middle-market companies and includes the highly respected GE Antares unit, would sell first and quickly.
Potential bidders for the PE loan group include investment firms Apollo Global Management (NYSE: APO), Ares Management (NYSE: ARES), Blackstone Group (NYSE: BX), Kohlberg Kravis Roberts & Co. LLP (NYSE: KKR); Japanese financial services company Mitsubishi UFJ Financial Group Inc. (NYSE: MTU) and Atlanta, Georgia-based bank holding company SunTrust Banks (NYSE: STI).
As the sale process unfolds, GE Capital faces losing executives, several of whom have already left. For example, middle-market lender Golub Capital hired Chip Cushman, previously a managing director at GE Antares. "We are looking to fill north of 10 underwriting and origination positions," says Andy Steuerman, Golub’s head of middle-market lending. "It doesn’t hurt that GE Capital is up for sale. More people are coming here."
Houlihan Lokey hired Patrick Schoennagal, who was a senior vice president at GE Capital. Software company Splunk hired as CIO GE Capital's Snehal Antani, who served as GE Capital’s chief technology officer. 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.
Meanwhile, in the middle market, all eyes are focused on GE Capital Sponsor Finance. GE Capital Sponsor Finance -- which, in addition to Antares includes TMT, GE Equity and the Bank Loan Group -- has long played a powerful role in middle-market dealmaking. GE Capital is the largest lender in the space 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.
For more on GE Antares and the current lending climate, read Mergers & Acquisitions' recent Q&A with GE Antares CEO David Brackett.
Like many of today’s middle-market firms, GE Capital Sponsor Finance traces many of 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, 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. (NYSE: SMFG) 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. That deal was announced the same day GE said it would divest GE Capital to focus on its industrial business. 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, and that makes it harder to generate acceptable returns going forward, says GE. The company also hopes the sale will free it from increased regulation by removing its designation as a Systemically Important Financial Institution (SIFI). Previously, GE said in March that 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, Danielle Fugazy and Anthony Noto.