News Analysis: Buy in bulk

While the GE Capital sales have generated their own M&A micro-climate others are also busy buying firms or selling stakes. And the trend is set to continue as established managers seek to build scale and others turn acquisitive to get a foot in the growing private debt market, sources tell PDI.

At the end of June, GE Capital announced it had agreed to sell its European sponsor finance unit to Japanese lender, SMBC. The two firms agreed a price of $2.2 billion for the business, which also happens to match the total for the portfolio of assets that comes with the purchase. 

A source close to the bank confirmed to PDI that SMBC, which already has a European leveraged finance business with just shy of $2 billion in assets, was attracted to the purchase by the European unit’s rich network of sponsor relationships.

And buying relationships is what one US firm considering a move into Europe said was the major benefit of gaining a foothold via acquisition rather than organic growth. 

Other recent examples of acquisitions driven by the promise of relationship access and instant expertise include Mediobanca’s purchase of a 51 percent stake in credit asset manager Cairn Capital. That deal almost trebled the Italian lender’s indirect assets under management (AUM). 

For Apollo Global Management, the acquisition of AR Capital gives it access to the firm’s substantial distribution network, as well as more than doubling its real estate AUM to around $27 billion – a target that the firm’s co-founder Josh Harris said was an aspiration for Apollo on an earnings call days before the agreement was revealed. Also announced over the summer was Benefit Street’s takeover of the investment adviser of TICC Capital Corp. The BDC has struggled, leverage has inched closer to the 1:1 cap mandated for the regulated mid-market finance companies and its share price has fallen to trade well below net asset value. But with Benefit Street at the investment helm, TICC is hoping a safe pair of hands will navigate it away from the syndicated loan market into the more difficult to source world of private mid-market lending. 

The other driver for the recent, and continuing, rash of M&A is scale. 

Arbour Partners’ managing partner James Newsome, who is working with firms considering acquisitions, says gaining size is important in the private debt market. 

“The reason why consolidation is more likely in the private debt market than in private equity is because you need to build scale quickly to make the GP economics work,” he says. “With management fees under pressure and with considerably less room to earn carry than in smaller private equity firms, credit GPs are keen to build economies of scale quickly and will listen to ideas from larger houses.”

The summer’s biggest example of the search for scale was the merger between Ares Management and Kayne Anderson. Combined, the two firms have $113 billion in AUM, based on the firms’ respective totals as of 31 March. 

The new firm, Ares Kayne Management, will create a new energy vertical built on Kayne Anderson’s existing energy business while combining the firms’ other matching business lines. 

And rather than cost synergies – the standard justification for most mergers – Ares’ Glenn August said that they will focus on revenue synergies. Despite many overlapping strategies, of the firms’ combined 2,700 investor base, only 30 LPs already invest with both firms, said August. 

The transactions above are just a sample of the deals that have been done. GAM/Renshaw, Bay Fortress/Mount Kellett, PennantPark/MCG, Omni Capital/Brookland, Hayfin’s internal shareholder reorganisation, and the GE Capital disposals all combine to build up a picture of a consolidating market. 

And though the drivers for debt managers are clear, investors will need to raise questions about the quality of each new addition as private debt enters the next phase.