Junior lender Penfund raises bulk of Fund VII’s C$1.5bn target in first close

About 90% of Penfund’s deals involve mid-market companies backed by sponsors like Leonard Green & Partners, Hellman & Friedman, Genstar Capital and OMERS Private Equity.

As private debt fundraising gathers steam, Penfund secured most of the C$1.5 billion ($1.2 billion) target set for its seventh offering in an initial close.

The Toronto junior capital investor in November raised C$928 million for Penfund Capital Fund VII, or more than 60 percent of the target, partner Richard Bradlow told Buyouts.

The vehicle, which has a hard-cap of C$1.65 billion, is expected to wrap by the second quarter of next year, Bradlow said. “A substantial portion of the balance,” he said, “is already lined up.”

Initial backers were returning limited partners writing bigger checks and one major new investor, Bradlow said. Fund VI, closed in 2018 at C$1.15 billion, signed up about 40 institutions and other LPs based in North America, Europe and Asia. Its successor aims to build out the investor base with the help of placement agent PJT Park Hill.

Bradlow attributed LP demand in part to the growing appeal of the asset class, which is perhaps indicated in this year’s private debt fundraising. Capital raised by global funds reached nearly $150 billion as of September 30, up 19 percent from the same time in 2020, affiliate title Private Debt Investor reported.

In addition, Penfund’s longtime specialisation in junior lending to mid-market borrowers resonated with investors, Bradlow said.

One-stop shop

The 42-year-old firm provides second-lien debt, high-yield debt and other types of financing to North American companies with EBITDA of $50 million to $150 million. Dealflow is sourced in defensive sectors in which it has a history, such as auto aftermarket, healthcare, distribution, consumer staples, waste management, food processing and insurance brokerage.

A main draw of the strategy, Bradlow said, is its second-lien focus. This owes to the fact that many LPs have tapped out on portfolio allocations to first-lien fund partners. Second-lien is also today more compelling than first-lien “from a relative return perspective”, he said.

Another key aspect of the strategy is its emphasis on US private equity-backed businesses. About 90 percent of Penfund’s deals involve “top-tier sponsors operating in the sectors we’re targeting”, Bradlow said. Examples include Leonard Green & Partners, Hellman & Friedman, Genstar Capital, OMERS Private Equity, The Riverside Company and Flexpoint Ford.

For sponsors, Penfund is “a familiar, one-stop shop” for junior capital, Bradlow said. The firm is typically the sole or lead provider of second-lien financing in a deal. It also commits to hold each loan to maturity. Finally, its sector experience means a sponsor “doesn’t have to educate us about the industry”, he said.

On to Fund VII

Fund VI made a dozen investments, several of them this year. They include a follow-on second-lien financing, announced in October, of 24-7 Intouch, a digital customer care and technology company backed by Ontario Teachers’ Pension Plan and Trilantic North America.

Earlier, the fund supplied second-lien debt to support Genstar’s acquisition of Arrowhead Engineered Products, a supplier of aftermarket replacement parts; OMERS’ acquisition of Gastro Health, a gastroenterology physician practise manager; and Flexpoint’s acquisition of CHS, a distributor and maker of medical and surgical products.

Fund VII’s potentially larger capital pool will allow for up to 15 investments, Bradlow said, with Penfund’s outlay per deal ranging from $25 million to $150 million. The vehicle’s first two investments, representing more than 10 percent of the target, will be announced in January.

As it gets ready for 2022, continuing high levels of dealmaking are providing Penfund with “a very robust pipeline”, Bradlow said.

Fund VII comes roughly a year after a major succession at Penfund that saw its top executive, chairman and partner John Bradlow, retire. Bradlow, Richard’s father, was with the firm for more than two decades. In 2000, he co-led its management buyout from then parent CIBC.

The five-year succession process “went very smoothly”, Bradlow said, because “the capabilities of the firm have been institutionalised for some time”. Penfund’s leadership team now consists of Bradlow and four other partners: Adam Breslin, Jeremy Thompson, Nicole Fich and Joe Mattina.

Penfund, founded in 1979, is proud of its track record. Of more than C$2.5 billion deployed across 56 investments since 2000, it has shown only one realised loss of C$1.4 million, Bradlow said. This amounts to a cumulative realised loss ratio of less than 0.1 percent.