A marriage of equals or leverage in drag?

“Deals as large as $400 million close in as little as three weeks. With no flex. No ratings. No syndication meetings.” It sounds convenient, doesn’t it?

This is the way Ares Capital and GE Antares describe their Senior Secured Loan Program (SSLP) joint venture on the SSLP website. But the partnership is drawing to a close, as General Electric sells off most of its lending business.

Ares’ BDC has formed a new partnership, the Senior Direct Lending Program, with Varagon Capital Partners, until now a little-known lender, backed by AIG and Oak Hill Capital Partners. Meanwhile, GE Antares, which has been sold to the Canada Pension Plan Investment Board (CPPIB), plans to join forces with CPPIB’s own lending force or other pension funds or insurers for a similar venture.

Though both sides are making the sort of ‘we don’t need you anyway’ noises that are customary at the end of a relationship, it’s no secret that the SSLP has been the largest and most successful JV in the business. Combined, GE’s and Ares’ origination capabilities delivered strong returns and a low default rate. GE’s size and low cost of capital helped the platform do large deals, close quickly and drive performance. “When managers announce a partnership, most people want you to believe it’s going to be like what Ares had with GE, which is where GE provided the leverage, Ares was effectively the equity and both brought something to the table from an origination point of view,” says a BDC analyst.

BDCs’ leverage is capped at 1:1, so many are entering into JVs to raise that to 2:1. They typically team-up with an investment firm like a wealth manager, family office or insurance company as an equity partner and tap a bank lender for a credit line. And while most admit that they are doing it to achieve off-balance sheet leverage, some still market their venture as an equal partnership, where the boards are set up with equal representation. In reality, most of these so-called partners have no loan origination capabilities in-house, and might not be aware of the risk they’re buying. Though some have a veto and can say no to a deal.

BDC analysts tell PDI that the Securities and Exchange Commission is developing qualms about how some of these partnerships actually work and will start digging into the area soon. As with most things in alternative lending, the details, structure and terms of these deals are murky. They are rarely visible in the public domain on a stand-alone basis. When you add a partner or two, leverage providers, separate JV entities, the granularity of the loans and where the assets are held, the terms become even less visible.

At this stage in the credit cycle, high default rates aren’t a major problem. But once they start to crop up as the credit cycle turns and perhaps when the regulators actually start sifting through the detail of some of these JVs, it will become clearer which are true partnerships and which are managers just milking their less-informed cohorts for capital and leverage.