Cerberus Capital Management has formed a separately managed account with New Jersey’s $68 billion pension system that will make loans to mid-market companies, a strategy that has become increasingly attractive to private equity shops and their limited partners.
The customised vehicle will be a $300 million fund, with a 1 percent management fee and a 17 percent carried interest rate, according to pension documents from the New Jersey Division of Investment. The fund will invest alongside Cerberus’ existing mid-market lending fund – the Cerberus Loan Opportunities Fund, which has been in fundraising this year.
The Loan Opportunities Fund has raised more than $1 billion, market sources told Private Equity International. The Pennsylvania Public School Employees' Retirement System made a $200 million commitment to the fund earlier this year.
Cerberus has been involved in mid-market lending since the 1990s and has an experienced team that runs the firm’s mid-market lending business.
Key executives in the loan opportunities fund include Kevin Genda, chairman of the lending business, who joined the firm in 1995 from mid-market lender Foothill Capital prior to its acquisition by Wells Fargo; Daniel Wolf, president of Cerberus Business Finance, who joined the firm in 1997 from Congress Financial Corporation; Eric Miller, who leads the loan origination team and joined Cerberus in 1998 from CIT Group and Joseph Naccarato, chief credit officer, who joined the firm in 2000 from Bank of America’s commercial funding business.
Cerberus’ mid-market lending business operated multiple mid-market loan funds prior to launching the most recent loan opportunities fund, which is a close-ended vehicle with a two-year investment period and recycling provisions. The firm’s lending business does not invest in Cerberus’ private equity deals.
The firm typically holds onto the majority position in any of the loans it makes, as opposed to syndicating out the debt to other investors. The firm “almost always retains a controlling interest in the loan; [Cerberus will] syndicate down for diversification, but … always retain[s] control,” according to a person with knowledge of the firm’s strategy. This strategy gives LPs confidence that the firm is making loans to companies it considers solid, rather than just selling off the debt, the person said.
It's not even funny how bad it is out there for small companies to get a loan from a bank.
Cerberus’ lending business boasts average net returns of 8 percent to 12 percent over its 16-year track record, according to pension documents.
New Jersey was interested in building exposure to mid-market lending because “a significant supply demand imbalance of loans being originated to mid-market businesses has created an attractive investment opportunity with potential gross returns in the 9 percent to 15 percent range”, the pension system’s investment staff said in documents.
In other words: “It’s not even funny how bad it is out there for small companies to get a loan from a bank”, according to one person with knowledge of the strategy. “There’s huge demand, and very little supply.”
The mid-market lenders that are active have been extremely busy, with “more deals than they can handle”, according to one mid-market lending professional. Many traditional mid-market lenders like banks or collateralised loan obligation funds have disappeared since the financial crisis.
The strategy made headlines in November when The Carlyle Group announced it was acquiring a major mid-market lending organisation, Churchill Financial. Distressed investor WL Ross’s portfolio company Amalgamated Capital also announced in November it was expanding its product offering to include leveraged cash flow and asset-backed debt to finance private equity deals in the lower mid to mid-market.
New Jersey has moved into separate accounts in a big way. The pension system also announced the formation of a “strategic relationship” with The Blackstone Group this month that will include commitments of $1.5 billion to customised accounts that will invest across asset classes, including credit and real assets.