It’s official Canada’s largest pension fund, Canada Pension Plan Investment Board, is buying GE Capital’s Sponsor Finance Unit, which includes GE Antares, from GE Capital for $12 billion. The deal marks CPPIB’s entry into U.S. middle-market loans.
The Sponsor Finance group, which is headquartered in Chicago, makes loans to private equity-backed companies. GE Antares has relationships with more than 300 private equity firms. During the past five years, the group has made more than $120 million worth of loans. The unit, a crown jewel in GE Capital’s lending portfolio, is one of the reasons the firm was named Mergers & Acquisitions M&A Mid-Market Lender of the Year for 2014 and for 2010.
The Sponsor Finance division has been expected to sell first and quickly, sources told Mergers & Acquisitions. In addition to GE Antares, the division group includes TMT, GE Equity and the Bank Loan Group.
CPPIB is making the deal through a subsidiary, CPPIB Credit Investments Inc., and alongside GE Antares’ management. Sponsor Finance CEO Stuart Aronson, and David Brackett and John Martin, co-CEOs of GE Antares, are staying on board. The deal is expected to close in the third quarter. For more, read our Q&A with Brackett.
GE Antares, which has about $14 billion in assets under management, will operate as a standalone, independent business with its own board of directors. CPPIB says it is partnering will GE Antares’ entire management team and its 300 employees.
CPPIB, a busy private equity investor led by CEO Mark Wiseman, says the deal complements its principal credit investments portfolio, which invests in leveraged loans, high yield bonds, mezzanine, intellectual property and other financing options. The segment targets $50 million to $1 billion positions in credits, and sometimes underwrites its own investments. The principal credits group has invested more than $17 billion in the global credit markets since 2009.
CPPIB says it views GE Antares as a platform investment and will add growth capital to the lender.
“We have been studying the attractive economics of the U.S. middle market lending sector for several years,” says Mark Jenkins, senior managing director and head of private investments for CPPIB. “Antares represents a rare opportunity to invest in the leading lender in this segment of the market and involving companies owned by private equity sponsors,” Jenkins says. “With this single transaction, we immediately acquire turn-key scale and a long-term partnership with the best, most experienced management team in the market. This business is extremely complementary to our existing business, which is not focused on the middle market.”
CPPIB beat a slew of bidders, said to 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. Debevoise & Plimpton LLP advised CPPIB on the deal.
GE Antares is part of GE Capital’s Sponsor Finance Group, which was put up for sale on April 10 with General Electric (NYSE: GE) CEO Jeffrey Immelt’s announcement that the company would sell almost all of GE Capital to shed its Systemically Important Financial Institution Status and refocus on its industrial businesses.
Sponsor Finance is part of a larger GE Capital group, GE Capital Commercial Lending.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. had reportedly considered bids for the whole Commercial Lending division.
When the GE Capital sale was announced in April, many middle market lenders saw it as an opportunity to grab market share, and some saw it as an opportunity to grab 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.
Several units of GE Capital have attracted dealmaker attention since the group was put up for sale. On the day of the sale announcement, Blackstone and Wells Fargo agreed to buy real estate operations for about $26.5 billion.
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.
GE also 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."
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