Several recent transactions indicate that investors continue to be drawn into the middle-market loan arena as they continue their never-ending searches for yield in a low-interest-rate environment. Capitala Finance Corp. (Nasdaq: CPTA), Mosaic Capital Partners and Fifth Street Senior Floating Rate Corp. (Nasdaq: FSFR) are among the groups exhibiting interest.
Capitala and Cion Investment Corp. (which is sub-advised by Apollo Investment LLC) created a joint venture in July to gain even more access to the space Cion/Capitala Senior Loan Fund I LLC. Both partners are structured as business development companies (BDCs), which already gives them a way in to middle-market loans.
The new fund will invest in senior secured loans to broadly syndicated and large middle-market companies, which are less risky than loans Capitala generally invests in, according to Steve Arnall, Capitala’s chief financial officer. The agreement has other benefits, too.
“With the leverage put on this transaction, we’re going to earn double-digit yields as an investor,” Arnall says. “We can’t afford to have that leverage on our balance sheet.” That’s why the lender entered into the joint venture with Cion.
Mosaic is also getting in on the action, and closed a $165 million small business investment company fund that will provide mezzanine debt and equity to lower middle-market companies.
Fifth Street partnered with the Glick family office to create FSFR Glick JV LLC in November. The JV, because of a loan facility, can use leverage of up to a 2:1 debt-to-equity ratio, as opposed to being constrained by the usual 1:1 ratio affixed to BDCs.
“The joint venture is an important long-term partnership for FSFR, which we believe should increase FSFR’s returns on its invested equity and expand its investment opportunity set,” said Ivelin Dimitrov, CEO of Fifth Street Senior Floating Rate Corp.
In April, the joint venture announced it was putting $86.6 million of its anticipated $300 million investment capacity into a portfolio of senior secured loans. Fifth Street’s goal behind the deal was simple returns which are expected to hover at interest rates in the low teens.