GE Antares & CPPIB: Taken by surprise

In hindsight, most private debt managers will say General Electric’s decision to sell off its lending division makes sense, as the firm is regulated like a bank and was also burdened with the systemically important financial institution label. Though when the sale announcement first surfaced, it took the industry by surprise. Many were taken aback that GE would get rid of such a large and successful business.

And as the sale of the various GE Capital units progress, the surprises continue. It was clear from the get-go that GE Antares, the business that works exclusively on mid-market sponsor-backed deals, was most interesting to alternative lenders. In fact, for many, it’s a direct competitor. When GE inked a deal with the Canada Pension Plan Investment Board (CPPIB) on 9 June, market players were again surprised.

 

CPPIB SALE

Many expected this unit and most other parts of GE to be sold to banks, asset managers or insurers. A Canadian pension fund was not high on the list of acknowledged or suspected bidders. Indeed, the other front-runners for the business were banks and asset managers. They included Ares Management, Apollo Global Management, Guggenheim Securities, KKR and Sumitomo Mitsui Banking Corp. The firms that have been scooping up other units and GE Capital portfolios also include a variety of banks, insurers and asset managers.

Market players tell PDI that the identity of the buyer is good news for Antares employees, who will remain intact at Antares Capital, which will operate as a stand-alone business under CPPIB. Though some are disappointed they’ve lost the chance to poach some of those employees – the expectation had been that the business would likely go to a firm with an existing team, rendering many of Antares’ staff redundant.

CPPIB, which bought Antares for $12 billion, does have its own debt business, a unit known as Principal Credit Investments (PCI). The pension fund has no plans to merge GE Antares with that group and their activities are distinct enough. John Martin and David Brackett, the co-heads of the business, will also continue as managing partners. “There are no plans to combine it with PCI. We’ll be operating as standalone investment business,” Brackett says. “We’ll obviously look to coordinate activities with them but we’re going to operate independently.”

 

CAPITAL COSTS AND STRUCTURE

GE Capital has historically offered low interests rates to borrowers. Antares executives and other industry experts tell PDI they will be able to keep costs down once they are operating under a pension fund.

Martin also tells PDI that although he plans to continue focusing on senior and unitranche investments, he also expects to add more junior capital going forward, as it was an area largely shunned by banks since the financial crisis, but would be attractive to CPPIB. “Our core focus will continue to be the senior side of the balance sheet, but we’re going to have capabilities that we haven’t had beyond that, whether it’s investing in junior debt, mezzanine, second lien,” he explains.

 

WHITHER SSLP?

The sale did not include the assets held within the SSLP (Senior Secured Loan Program) partnership that GE Antares runs with the Ares Capital Corporation (ARCC) BDC. Because Ares Management was in the running to bid for the GE Antares unit, Ares and Antares executives couldn’t discuss the venture’s future until a deal closed. Once the CPPIB deal was announced, Antares and its new owner opened talks with Ares about what to do with the SSLP.

In another surprising move, Ares issued an announcement shortly before PDI went to press naming a new partner for a Senior Direct Lending Program (SDLP), with US lender Varagon Capital, which was launched with backing from AIG in 2013. Though the announcement didn’t make clear whether the SDLP officially succeeds or replaces GE Capital as a partner.

Ares, GE and Varagon all declined comment, but sources tell PDI that the three-way discussion is still ongoing, and as they have so far failed to reach an agreement, Ares posted the Varagon announcement as a “plan B”. So the question remains as to whether the new partnership formally replaces the old one.

The sense is, sources say, that the legacy SSLP portfolio will be wound down because talks between CPPIB and Ares are failing. Some industry players think the pension plan and the asset manager could end up dueling over who retains the lucrative legacy assets. Ares executives have said on previous earnings calls that both firms have to approve what happens to the assets, as well as a new partner, if one is chosen.

“Our hope is that there will be a mutually agreeable resolution that we can find to continue that program, but if that’s not possible, we’ll continue to provide the kind of financing through that program on our own,” Martin tells PDI.

The overarching theme that keeps coming up among BDC analysts and other lenders is that Ares is unlikely to find such a strong partner as a replacement. When the Varagon announcement came out, it caught some industry executives on the hop, as they had never heard of the firm before. “We believe the loss of human capital is likely to dampen ARCC’s new SSLP prospects. While we remain confident that ARCC will continue to originate unitranche loans in a new program, one must assume that under a new arrangement, they’d do it a slower pace than in the past,” concluded a research report from Wells Fargo Securities on ARCC.

Replacing GE as a capital partner shouldn’t be hard, the research report continues: “We believe GE’s stated return on the $7.3 billion of senior notes equates to 4.3 percent plus half of any origination fees, which equates to a 5.2 to 5.5 percent total return on the notes. In our view, Ares likely has financial partners willing to accept that return in order to engaged in a new unitranche partnership with ARCC.”

GE was particularly strong on the origination side and if Ares doesn’t reach a deal with CPPIB, it will lose access to the human capital at Antares that was so valuable to the partnership. “The SSLP did benefit from GE’s vast origination network (among the largest in the US). Now both parties claim that they will have no problem ‘acting on a sole basis’, but the fact of the matter is each partner relied on the other’s human capital/expertise. In our view, any potential partner ARCC brings on will lack the human capital element brought to bear via the Antares platform,” argues the Wells Fargo research piece, which was published ahead of the Vargaon announcement. Though it notes this isn’t a vote against Ares, Wells Fargo still rates Ares highly.

 

BUSINESS AS USUAL

Perhaps a successful marriage is coming to an end. Or maybe yet more surprises will move the situation along again. The industry is watching with bated breath to see what happens. In the meantime, the Antares unit and GE Capital business lines up for sale continue lending, which is perhaps not all that surprising, as borrowers are keen to benefit from GE’s low cost of capital before that window closes.

And following a period in limbo, for the Antares  team, it’s a busy time: “Our inbox is chock full of e-mails from people that are interested in re-connecting. It’s not surprising. There was a lot of uncertainty of what was going to happen for us, and regulated entities have been a challenging place for people to work, so the prospects of having clarity and not bein