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Thomson Reuters LPC Middle Market Loans Conference
The Middle Market Evolution Continues:
A View from Above
April 27, 2016
The Middle Market Evolution Continues: A View from Above
Moderator
Robyn E. Roof
Head of Loan Syndicate, Sales and Research
KeyBanc Capital Markets, Inc.
[email protected]
Panelists
Kevin F. Burke
Head of Loan Syndicate, Sales and Trading
Antares Capital
[email protected]
Walter Jackson
Head of Direct Lending Platform
Onex Credit
[email protected]
Eric Lloyd
Head of Global Private Finance
Babson Capital Management
[email protected]
Devon M. Russell
Contacts:
Robyn E. Roof
KeyBanc Capital Markets
212-476-7423 / [email protected]
James Hussney
KeyBanc Capital Markets
216-689-3559 / [email protected]
Alexandra Vidmar
KeyBanc Capital Markets
216-689-3323 / [email protected]
Juan Gomez
KeyBanc Capital Markets
216-689-3234 / [email protected]
2
Agenda
I.
Middle Market: The Commercial
II.
Middle Market: The Evolution
III.
Middle Market: The Future
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I. Middle Market: The Commercial
Middle Market: The Commercial
Compelling Opportunity for the Middle Market
Small Business
Middle Market
Big Business
<$10MM
Annual Revenue
$10MM - <$1B
Annual Revenue
>$1B
Annual Revenue
~ 6MM
Businesses
200,000
Businesses
~ 2,000
Businesses
35%
Employment
34%
Employment
31%
Employment
5th Largest Global Economy
Sources: National Center for the Middle Market, 4Q15 Report; CIA World Fact Book
$4.3T (~33%) in Private Sector GDP
5
Middle Market: The Commercial
PE backed companies (1995-2013)
Comparative Sales Data
Comparative Jobs Data
134%
84%
31%
PE-backed Business
All Businesses
27%
PE-backed Business

Banks remain the predominant source of outside capital for business of all sizes

Banks are disrupted by newer nonbank lenders and other source of capital

Banks and nonbank capital sources collaborate
All Businesses
Sources: Association for Corporate Growth, Access to Capital – How Small & Mid-size Businesses are Funding their Futures
(National Center for The Middle Market & Milken Institute)
6
Middle Market: The Commercial
Diverse Investor
Size of Market
Base
Shorter Duration
Favorable Pricing
MIDDLE MARKET
INCLUDES 200,000
BUSINESSES IN ALL
INDUSTRY SEGMENTS
AND GEOGRAPHIES
Lower Defaults /
Higher
Recoveries
"Skin in the
Game"
Capital Structure
Seniority
Lower Risk Profile
Less Volatility /
More
Increased
Conservative
Liquidity
Structures
Sources: Antares Capital, The National Center for the Middle Market – 2014 Annual Report
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II. Middle Market: The Evolution
Middle Market: The Evolution
FinCo
Insurance
Company
Private
Equity
Heller Financial
professionals leave to
start Antares (1996)
David L. Babson & Co.
traces back 75 years
Founded in 1984, and
went public in 1987
GE acquires Antares
(2005)
MassMutual acquires
Babson (1995)
Onex Partners has
raised 4 large cap PE
funds
GE Antares acquires
Merrill Lynch Capital
(2008)
Babson acquires First
Union Institutional Debt
Management (2002)
Antares joins forces
with CPPIB (2015)
Babson rebranded as
Babson Capital
Management (2004)
ONCAP has raised 3
funds since 1999
Onex Credit was
acquired by Onex in
2007. Recently
expanding Direct
Lending Platform
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GE Capital Evolution
Private Equity Finance Unit
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Middle Market: The Evolution LTM
Banks
CLOs
BDCs
Direct Lending Platforms
Note: Each category organized top down, from newest to oldest
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
11
Middle Market: The Evolution - Banks
Huntington Bancshares to strengthen Midwest franchise with
Jan-16 financially and strategically accretive merger with FirstMerit
Corporation
Nov-15 M&T Bank completes acquisition of Hudson City after 3-Year delay
Nov-15
L.A.'s 'bank to the stars,' City National Bank, now under Canadian
ownership – RBC
Oct-15 KeyCorp to acquire First Niagara Financial Group
Aug-15 CIT Completes acquisition of OneWest Bank
Apr-16 Japan's SMBC Nikko sets up investment banking team in New York
Mar-16 SunTrust plans to hire as many as 200 in mid-market M&A push
Oct-15
Regions adds mid-market I-Bank BlackArch, as financial services
drive M&A
Aug-15 TPG joins Thain’s CIT to form special-situations lending venture
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
12
Middle Market: The Evolution – CLOs
Feb-16 Golub prices $478MM CLO – L+ 233
Feb-16 NewStar prices $348MM CLO – L+ 230
Dec-15 Maranon prices debut $355MM CLO – L+ 210
Oct-15 Cerberus prices CRR $413MM CLO – L+ 205
Sep-15 Fifth Street prices $417MM CRR-compliant CLO – L+ 192
Aug-15 NewStar prices $398MM risk-retention compliant CLO – L+ 200
Jul-15
Golub prices $558MM CLO – L+ 180
Jul-15
BMO Asset Management prices $308MM CLO – L+ 195
Jun-15 Carlyle GSM prices debut $399MM middle-market CLO – L+ 185
May-15 Fifth Street prices CRR-compliant $309MM CLO – L+ 180
Apr-15 NXT Capital prices $409MM CLO – L+ 185
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
13
Middle Market: The Evolution – BDCs
Apr-16 Ares forms new middle market lending venture with Varagon
Apr-15 Ares Management fund acquires loan portfolio from First Capital
Apr-16 Tennenbaum Capital nets minority investment from CNO Financial
Mar-16 Monroe Capital launches specialty finance business for Fintech
Nov-15 Monroe Capital launches ABL unit; Moser, Price co-heads in Boston
Aug-15 Monroe Capital, Channel Partners launch JV for working capital loans
Jan-16 NewStar Business Credit launches unitranche loan initiative
Oct-15 Solar Capital adds Voya as partner on unitranche fund
Aug-15 BDCs Medley Capital, Sierra Income ink new financing for JVs
Jul-15
Capitala Finance, CION launch middle-market lending JV
Jun-15 Fifth Street Finance sells healthcare direct lender to rival MidCap
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
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Middle Market: The Evolution – BDCs
Mar-16
Griffin-Benefit Street Partners-BDC says regulation, investment limit
behind new structure search
Feb-16 Full Circle evaluating company sale, blames challenging market
Feb-16 Prospect Capital stock drops 5% amid news of possible SEC probe
into valuations
Nov-15 Prospect Capital details portfolio, moving ahead with spin-off plan
Nov-15 American Capital unveils strategic review, including potential sale
Oct-15 BlackRock hires Zugay from Ares to head middle market investments
Jul-15
BDC Carey Credit Income Fund launches public capital raise
Jul-15
Audax files plans for non-traded middle market BDC
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
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Middle Market: The Evolution – Direct Lending Platforms
TBA
Apr-16 Young exits Och-Ziff to co-found new alternative asset manager
Apr-16 Goldman Sachs’ Walt Jackson to launch Onex direct lending platform
Feb-16 Stuart Aronson joins H.I.G. capital as head of U.S. direct lending
Feb-16
KKR's Lipschultz to Launch Private Debt Firm with Blackstone's
Ostrover
Jan-16 GSO, Rivington team up for middle market energy investments
Jan-16 Adams Street to pursue new middle market private credit strategy
Dec-15 Great Rock, Two Sigma launch middle market lending platform
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
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Middle Market: The Evolution – Direct Lending Platforms
Nov-15 Canadian pension fund PSP launches U.S. private debt fund
Nov-15 DDJ Capital hires head of middle market loan origination
May-15 AllianceBernstein middle market direct lending platform nets $1.1B
Apr-15 B Riley Financial, KKR form middle market lending venture
Apr-15
TIAA-CREF launches new senior loan money management unit Churchill Asset Management
Apr-15 KKR steps up middle market direct lending with close of $1.34B fund
Sources: SEC filings, Thomson Reuters’ LPC Loan Connector, Standard & Poor’s Leveraged Commentary & Data (“LCD”), Bloomberg & individual investor websites
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Middle Market: The Evolution
New Credit Platform Formation
Market Dynamics
Success Factors
• Banking regulation and BDC volatility
have created opportunity
• Barriers to entry are increasing
• Platform differentiation, product
breadth, and scale are increasingly
important
Human
Resources
Challenges
Regulation
Mark-to-Market / Other disclosures
Conflict management
Relative value
Overhead investment amount and
pace
• Market timing
• Liquidity / Unlevered Yield
•
•
•
•
•
Sources: Devon Russell
Relevance
• Scale, Stabile, Consistent,
Predictable, Flexible
• Advisory / Industry verticals
• Broad product / Service spectrum
• Appropriately skilled team
Capital
Base
Addressable
Market
Clients
Independence / Diversity
• Sources of capital
• Financing opportunities
Product
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III. Middle Market: The Future
Middle Market: The Future
Bank’s share of middle-market sponsored private deal submissions dips in 4Q15
100%
90%
Share of deals submitted
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Regional Banks
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
Non-Banks
Sources: Thomson Reuters LPC
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Middle Market: The Future
Leveraged lending guidance: Impact on / of non-banks lenders
U.S. LBO Bookrunner League Tables (Volume in $Billions)
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Madison Capital
JPM
Antares
Macquarie
BAML
GS
Citi
BMO
Nomura
MS
RBC
DB
CS
Macquarie
Citi
BMO
Nomura
0
RBC
0
GECC
2
UBS AG
2
Jefferies
4
BAML
4
MS
6
JPM
6
GS
8
Barclays
8
DB
10
CS
10
2015 League Tables
Jefferies
2014 League Tables
Barclays
12
Sources: Thomson Reuters LPC
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