Ares, Varagon beef up senior debt investment vehicle

The winddown of Ares’ Senior Secured Loan Programme allowed it to commit additional funds to the current effort with Varagon.

Ares Capital Corporation and Varagon Capital Partners have significantly upped the size of their Senior Direct Lending Programme joint venture, after AIG and another investor have made substantial contributions to the Ares-Varagon partnership.

The size of the programme, which stood at $2.9 billion, has increased to approximately $6.4 billion, the JV participants said in a statement. AIG, which is a backer of New York-based Varagon, will up its investment in the SDLP by $500 million from $2.25 billion to $2.75 billion, while an unnamed insurance company has agreed to contribute $2 billion.

Varagon and Ares will collectively make up to $1 billion more available. The former will provide an additional $125 million to the effort, while New York-based Ares, the business development company of Los Angeles-based Ares Management, will contribute an additional $875 million.

“If you look at SSLP, the outstanding assets in that vehicle were over $10 billion,” said Walter Owens, the chief executive of Varagon. “As you look at the potential size of the SDLP, you could see that being the same size or larger based on the unitranche market opportunity.

“Sponsors are also looking at first lien-second lien executions comparing to unitranche. In a dislocated market, the certainty and pricing of unitranche becomes even more attractive,” Owens said. He added that the SDLP has provided  Varagon’s investors in both the SDLP’s senior notes and subordinated certificates with attractive returns.

In August, Ares Capital purchased the remaining $1.6 billion in assets from the SDLP’s predecessor, the Senior Secured Loan Programme partnership with GE Capital. Ares CEO Kipp deVeer said on the call the firm’s 2017 second-quarter earnings call that Ares would have additional investment capacity as a result, which he noted could be used to beef up the partnership with Varagon.

Purchasing those assets concluded the winddown of the SSLP, which ended with GE Capital dismantling its financial arm, including selling its mid-market lending platform, Antares Capital, to the Canada Pension Plan Investment Board.

The additional capital investment capacity came from the BDC’s so-called “30 percent basket”, leaving more money available to invest outside of core mid-market companies. Under US federal statutes, 70 percent of a BDC’s investments must be dedicated to non-listed companies or those listed with a market capitalisation below $250 million. The remaining 30 percent can be put towards other investments if the fund manager chooses.

The SDLP provides senior secured loans, including stretch-senior and unitranche facilities, to mid-market companies and has a hold-size of $300 million.

Editor’s note: Varagon upped its investment in the SDLP by $500 million, not from $500 million.