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LPC: New US mid-market loan funds show demand for private credit

NEW YORK, Oct 28 (Reuters) - US middle market lenders continue to rake in fresh capital commitments, underscoring the growth in demand for private debt among yield-starved institutional investors facing record-low interest rates and increased volatility.

Middle market direct lenders - those alternative debt capital providers that extend loans directly to borrowers - have seen significant growth in demand from institutional investors looking to deploy capital as they look beyond traditional fixed-income products in an ongoing hunt for yield.

In October, lenders to mid-sized US borrowers closed at least four new loan funds, with two exceeding their fundraising targets. The combined tally amounts to approximately US$5bn in capital to deploy, including equity commitments and available leverage.

“Investors are turning to alternative credit in search of higher yield, better diversification, and lower risk than offered by traditional asset classes,” said Randy Schwimmer, head of origination and capital markets for Churchill Asset Management, a unit of TIAA Global Asset Management, in a white paper published earlier this month. “Senior leveraged loans to middle market companies, in particular, are among the fastest growing private debt alternatives as banks curtail their exposure to riskier borrowers.”

Middle market specialists including Monroe Capital, Audax Group, NXT Capital and Bain Capital Credit each closed new investment vehicles this month, adding capacity to their existing lending platforms and investment strategies.

As institutional investors have become increasingly comfortable with the middle market asset class, allocations to the space have increased, easing fundraising efforts.

“Before, LPs allocated 1-2% to the asset class, so there were limited dollars. Now allocations have increased to 5%-10%, thus increasing the flow to private debt funds,” said Ted Koenig, president and chief executive officer of private credit asset manager Monroe Capital.


Chicago-based Monroe closed the US$800m Monroe Capital Private Credit Fund II LP eclipsing the fund’s US$600m target. Combined with leverage, the fund, Monroe’s eleventh investment vehicle and the largest raised to date, will have approximately US$1.5bn in total capital to invest.

“Sixty-five percent of our prior LPs re-upped and we picked up over 20 new investors,” said Koenig.

The new institutional investors are located in both the US and Europe, including public and private pension plans, insurance companies, universities, endowments, foundations, religious organizations, hospitals, non-profits, sovereign wealth funds, family offices.

The fund will invest in private credit transactions originated and underwritten by Monroe, focusing primarily on senior secured loans and unitranche loans to private equity sponsored and non-sponsored middle market companies located throughout the US and Canada.

Alternative asset management firm Audax Group announced the final close of a new loan fund. The Audax Senior Loan Fund III raised US$500m of committed equity. The fund was oversubscribed, exceeding its fundraising target by US$100m, the firm said in a statement. Combined with a credit facility of more than US$1.1bn in commitments, the fund has over US$1.6bn of total available capital to invest.

The SLF III investment strategy remains consistent with that of Audax’s senior debt business, part of Audax Private Debt based in New York , focused primarily on first-lien senior secured loans to US middle market companies as part of private equity-sponsored buyouts.

NXT Capital, another Chicago-based middle market lender, said it closed on approximately US$312m in equity for NXT Capital Senior Loan Fund IV. Coupled with targeted leverage, the fund will have approximately US$900m in capital to invest, NXT said in a statement.

The fund invests in senior debt transactions directly originated and underwritten by NXT Capital’s corporate finance group. The investment strategy focuses on senior secured loans and selectively, second-lien loans, made primarily to private equity-sponsored middle market companies.

Senior Loan Fund IV received equity commitments from US and international institutional investors including leading public and private pension plans, insurance companies and foundations.

Bain Capital Credit, the Boston-based dedicated private credit group of Bain Capital, meanwhile, debuted its new private business development company, Bain Capital Specialty Finance Inc, according to regulatory filings.

BDCs are a specialized type of closed-end investment vehicle that lend to small and mid-sized private US companies. BDC leverage is capped at a 1:1 debt to equity ratio. The universe includes both publicly-listed vehicles, which are traded on an exchange, and private, or non-traded, vehicles.

According to sources familiar with the fund, which is not listed on a public exchange, Bain Capital Credit has raised more than US$500m in equity for the BDC and has called approximately US$109m, or 20%, of the committed capital.

The firm opted for the BDC structure, the sources said, because of its appeal to overseas investors. The underlying investment strategy is no different from Bain Capital Credit’s existing senior direct lending effort, but provides an option for investors seeking middle market loan exposure who were unable to access the asset class through other strategies. (Reporting By Leela Parker Deo)