June 11, 2015 / 5:51 PM / 2 years ago

CPPIB creates mid-market powerhouse with GE unit buy

NEW YORK (Reuters) - Canada Pension Plan Investment Board’s (CPPIB) $12 billion acquisition of GE Capital’s sponsor finance business vaults Canada’s largest pension fund into the top tier of U.S. middle market lenders, market participants said on Thursday.

The acquisition puts Chicago-based Antares Capital, a highly-regarded unit of GE Capital Corp GEB.N that lends to private equity buyouts of small and mid-sized U.S. companies, under CPPIB’s ownership.

GE Capital is the financial services unit of conglomerate General Electric Co GE.N.

Until recently, CPPIB’s credit strategy focused mainly on large companies via its Principal Credit Investments (PCI) group, which has lent $17 billion globally since 2009 in primary and secondary leveraged loans, high yield bonds and mezzanine debt.

“In one transaction we are able to access the middle market in scale and acquire a best in class origination, execution and asset management platform,” said Mark Jenkins, CPPIB’s senior managing director and global head of private investments.

“With the portfolio, we acquire the exposure we want and with the platform, we acquire the machine to continue to grow that exposure. This is completely complementary to CPPIB’s credit investment portfolio,” he added.

Antares will operate as a standalone, independent business with its own capital base and will be governed by its own board of directors. The business will also retain the Antares brand and will remain under the helm of managing partners David Brackett and John Martin.

CPPIB is contributing $3.85 billion in cash toward the $12 billion purchase price and the rest will be financed with debt provided by a group of global investment banks, Jenkins said.

REGULATORY PUSH

CPPIB’s entry into the highly competitive and increasingly crowded field of middle market sponsor lending with its acquisition of Antares comes as increasing regulation is changing the lending landscape.

CPPIB, an AAA-rated entity with a permanent capital base, is not subject to U.S. banking regulations unlike GE, which was deemed a non-bank Systemically Important Financial Institution (SIFI) in July 2013.

That categorization subjected GE to regulatory capital, liquidity, stress testing, risk management and other requirements proposed by the Federal Reserve Board, GE said in its 2014 annual report.

The SIFI label contributed to GE’s decision two months ago to shed the bulk of its finance arm GE Capital, which housed the Antares platform.

“Operating without the regulatory constraints that are impacting the acquisition finance market will avail us of certain opportunities that we wouldn’t have had at GE,” David Brackett said.

The purchase will give Antares more flexibility with fewer regulatory constraints and will further strengthen the already robust and competitive platform by giving it significant and stable access to capital.

In the last five years, Antares has lent more than $120 million to U.S. middle market companies. The U.S. middle market is worth $96 billion a year, according to CPPIB.

CPPIB studied the attractive economics of the U.S. middle market for several years and the timing of GE’s sale of Antares gave the Canadian pension fund the opportunity that it had been looking for.

Buying Antares gives CPPIB the platform, assets and management team along with relationships with around 300 private equity firms, which are critical for generating dealflow.

COMPETITIVE DYNAMICS

The acquisition is a blow for middle market lenders and investors that saw GE Capital’s retreat from the space as an opportunity to win market share as Antares new home at CPPIB is likely to make the market more competitive.

“With CPP’s capitalization and the availability of permanent capital earmarked for our business, we are confident we will be as competitive as we were under GE,” John Martin said.

It is not yet clear how aggressive the new partnership will be and how Antares risk appetite will change beyond its long-term focus on senior debt.

Antares said that it will expand into junior capital as it continues to provide borrowers and private equity firms with its traditional products including senior debt and unitranche loans.

The combined platform is positioned for growth. CPPIB said in a statement that the Antares acquisition is a highly strategic, long-term platform investment and that it intends to invest follow-on growth funding into the business.

Editing by Tessa Walsh

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