CPPIB emerges as frontrunner in GE Capital sale

 The Canadian pension fund is reportedly in the final stages of negotiating to acquire most of GE Capital’s PE lending unit.  

General Electric is close to reaching an agreement to sell the business that backs private equity-sponsored deals to the Canada Pension Plan Investment Board (CPPIB), according to The Wall Street Journal and other publications. The sponsor finance unit sale, which includes GE Antares, would include more than $10 billion worth of GE Capital loans and could be announced today (8 June).

GE and the CPPIB, which at CAD264 billion is Canada’s largest pension fund, were still finalizing the terms on Sunday. The deal is expected to be one of the largest financial services deals in recent history. Apollo Global Management, Ares Management, KKR, Guggenheim Securities and Sumitomo Mitsui Banking Corp were also bidding on the unit, as previously reported.

A slice of the sponsor finance unit portfolio is tied up in the Senior Secured Loan Program (SSLP) partnership with Ares Capital, the $9 billion business development company (BDC) of Ares Management. It’s unclear what will happen to those loans, but recent reports suggest the SSLP portion will not be going to CPPIB. Ares might buy that portion of the portfolio itself with a partner, seek a new partner or wind down the portfolio, according to other recent reports and Ares Capital’s first quarter earnings call. Ares has said that the sale of those loans can’t occur without approval from both GE and Ares.

GE announced in April that it would be selling off most of its lending business. Chief executive Jeff Immelt has more recently set a goal towards selling off $20-$30 billion worth of those assets by the end of this month.

The GE Antares business specifically focuses on lending money to US mid-market companies that are backed by private equity sponsors. The unit lent $27 billion across 200 transactions in 2014.

General Electric is selling off the units in part because restrictions around lending by banks are getting tighter and the cost of continuing to operate this business isn’t worth the potential returns. The business was also identified as a Systematically Important Financial Institution (SIFI) by the Financial Stability Oversight Council of the US Treasury recently, meaning that GE’s activities would be even more heavily scrutinized going forward.

 GE’s cost of capital is much lower than alternative lenders. Market observers have argued that the exit of GE could remove a low cost provider and raise the bar on the average interest rates charged on loans backing mid-market private equity deals.