Why credit funds could be the next wave in M&A financing

Middle-market financing is in full swing. Firms have begun shifting towards credit funds, as investors pursue credit strategies. The demand for credit financing is growing as credit funds make loans to private equity firms backing companies using various strategies: senior secured, unitranche and mezzanine. Monroe Capital, CRG and the Carlyle Group raised credit funds recently.

“Credit funds are a bit sexier than they were 10 to 15 years ago,” says Monroe Capital CEO Ted Koenig. In October 2016, the Chicago-based lender raised an $800 million credit fund with nearly 30 percent of capital invested at the time. The fund’s strategy focused primarily on senior-secured and unitranche loans. Monroe Capital, founded in 2004, has seen a lot interest in the credit fund space, Koenig says. But a crowded field means that “those who are trying to get into the space now are having trouble.” Sellers average between 12 and 15 buyers for every deal, according to Koenig, so PE firms want lenders with experience in closing and executing deals.

The Carlyle Group LP (Nasdaq: CG) also raised a $2.8 billion credit fund, the second of its kind, in 2016. The fund targeted the energy sector, including: power generation, renewable energy, oil and gas production, oilfield services and midstream infrastructure. Carlyle’s credit fund underlines the firm’s strategy of making mezzanine loans to companies in the power and energy industries.

For lenders serving niche industries, such as healthcare, the credit fund space is not as crowded as it is for firms covering multiple sectors. “We’ve actually seen several specialists exit the sector after poor investment decisions, as well as limited participation from multi-strategy asset managers that would like to dabble in healthcare lending,” says Mike Weinmann, managing director of healthcare investment firm CRG. Weinmann says many of the asset managers that tip-toe into the healthcare space lack the industry experience to structure and underwrite deals properly.

Houston, Texas-based CRG closed a healthcare-focused private credit fund in January with $1.2 billion in capital and committed approximately $900 million of the fund to more than 16 companies. Among Carlyle, CRG and Monroe Capital, experience is the common thread. More credit funds are expected, as Monroe anticipates another fundraise in 2017.

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