TRLPC: Oak Hill, AIG launch mid-market lending platform

NEW YORK, June 13 Fri Jun 13, 2014 1:15pm EDT

NEW YORK, June 13 (Reuters) - Private equity firm Oak Hill Capital Management and insurer American International Group (AIG) have teamed up to establish Varagon Capital Partners, an asset manager and direct origination platform focused on lending to middle market companies.

Varagon is an independent firm jointly owned by AIG and partners of Oak Hill, Chief Executive Officer Walter Owens told Thomson Reuters LPC in a phone interview. Varagon launched with an initial $1.5 billion investment commitment from AIG.

The joint venture comes as institutional investors and alternative asset managers, including private equity firms, are increasingly expanding into the middle market lending space with new direct lending and credit investment platforms. Other institutional investors are gaining exposure through mandated separately managed accounts, the formation of business development companies or traditional loan funds.

"Varagon combines a true direct origination and risk management platform in the commercial banking tradition with the fundraising and portfolio management capabilities of an asset manager," said Owens, who prior to taking the helm at Varagon, held leadership positions at GE Capital, CIT Bank, and TD Bank.

Varagon will lend to companies with between $10 million and $75 million of Ebitda, focusing primarily on borrowers backed by private equity sponsors. But the team's industry heads will also evaluate opportunities to invest in non-sponsored businesses. The firm will make loans up to $350 million, typically holding from $20 million to $100 million of the deal with the remainder being syndicated to a lender group.

"Our investor is a risk adjusted return investor, which allows the firm to provide products up and down the capital structure, and to do it in size," said Owens. "They see the value in each product on a risk adjusted basis."

As such Varagon will invest across the capital structure, offering borrowers a range of options including first-lien credit facilities, unitranche and second-lien loans, as well as mezzanine financing.

"As a buy and hold investor with a core focus on credit discipline we are excited to partner with Varagon," said AIG Deputy Chief Investment Officer Brian Schrieber. "We believe that by applying strong credit discipline, middle market loans offer compelling risk adjusted returns. Varagon's experienced management team brings both fundamental credit expertise and strong industry relationships that we expect will produce high quality, directly originated investment opportunities," he added.

With interest rates expected to remain persistently low in the near term, alternative capital providers are likely to see sustained institutional appetite from investors aiming to generate higher risk adjusted returns through diversified fixed income portfolio allocations. At the same time, as banks face regulatory constraints designed to limit leveraged lending activity, non-traditional lenders are poised to step in to fill the funding gap for borrowers.

In addition to the commitment from AIG, Varagon is also targeting other institutional investors seeking middle market credit exposure, including insurance companies, pension funds, family offices, foundations and endowments.

Varagon's twelve person team is based in New York. (Editing By Jon Methven)

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