General Electric's (NYSE: GE) impending sale of GE Capital is expected to change the landscape for middle-market lending and open up opportunities for other players, many of which are chomping at the bit.
"When the largest player in the market share goes through internal uncertainty, it's going to create an opportunity for others," Ted Koenig, CEO of Chicago lender Monroe Capital, tells Mergers & Acquisitions.
The sale of GE Capital “positions us to be a more active originator and syndicator of first-lien senior debt, which traditionally has been a core business at GE Capital," Ares Capital CEO Kipp deVeer told analysts in a recent earnings call. Ares Capital and GE Capital Sponsor Finance partnered more than five years ago to form a senior-secured loan program. But now that the GE Capital unit involved in the partnership will be sold, Ares is looking for a new partner, deVeer said on the call. For now, the senior-secured loan program is still making loans, and has five deals in its backlog, deVeer said. GE Capital can't sell the loans in that unit's portfolio with Ares Capital's permission, so if another partner isn't found it's likely the program would go through a gradual wind down as the loans are repaid.
GE Capital Sponsor Finance, which includes GE Antares, is the GE Capital unit expected to sell first and quickly, according to a source inside GE. The unit focuses on lending to private equity-backed companies. Reported bidders include Apollo Management, Ares Management (NYSE: ARES) (not to be confused with Ares Capital), Blackstone (NYSE: BX), Kohlberg Kravis Roberts & Co. LP (NYSE: KKR), Mitsubishi UFJ Financial Group Inc. (NYSE: MTU) and SunTrust Banks (NYSE: STI).
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 what makes GE Antares special, 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.
Overall, interest in the Commercial Lending division has been very high since GE announced the sale of GE Capital on April 10. 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, Mitshibishi, and Wells Fargo & Co. have reportedly considered bids on the 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 would make 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.
--Mary Kathleen Flynn and Danielle Fugazy contributed to this report.