Apollo bulks up its MidCap lending unit as big competitors loom

Apollo touted the addition of $550 million in equity and leverage in the second quarter. The Bethesda, Maryland-based firm has been diversifying from its roots as a lender in the healthcare space since it was acquired by Apollo less less than two years ago. 

“We are very, very excited about the success of the team to date and the opportunities they are seeing in the marketplace,” Jim Zelter, global head of credit for Apollo, said July 29 on the firm’s quarterly conference call with analysts. “MidCap has been really in the healthcare industry, but we have successfully, through our integrated platform, brought in a variety of other financing opportunities.”

Apollo’s upped ante in MidCap Financial comes amid growing competition in mid-market lending. Canada Pension Plan Investment Board agreed in June to buy GE Capital’s U.S. Sponsor Finance Unit in a deal valued at $12 billion. The deal includes GE’s Antares business, a major lender in the middle market.

Meanwhile, Ares Capital, a former lending partner with Antares, teamed up with AIG-backed Varagon Capital to focus on senior lending. Also, Churchill Asset Management kicked off as a unit of TIAA-CREF, to ramp up its own senior lending business.

Even with this competitive landscape, Zelter said MidCap is positioned to benefit from the continued de-leveraging of traditional financial institutions in the post-Dodd-Frank era.

Nowadays, MidCap Financial focuses on five areas:

• General and healthcare asset-based working capital loans.
• Life science loans to venture-backed and public pharmaceutical, biotech and medical device companies.
• Real estate loans for nursing facilities, senior housing and medical buildings.
• Lender finance term loans or revolvers in the consumer and commercial financing sectors.
• Leveraged loans to companies backed by private equity sponsors.

Most of MidCap’s recent publicly announced deals reflect its long-time experience in healthcare. For example, it worked with Quotient Ltd, a diagnostics company, to increase its existing term credit facility to up to $50 million from $15 million.

A private equity lender in the middle market told Buyouts that it is unusual to find a credit specialist that limits itself to one industry. In the case of MidCap, it is positioning itself as more of a generalist.

A spokesman for Apollo declined to comment for this story.

MidCap’s roots

MidCap CEO Steve Curwin co-founded the firm back in 2008 after working at Merrill Lynch Capital Healthcare Finance and GE Capital Healthcare Commercial Finance. Howard Widra, co-founder and former CEO of MidCap, has joined Apollo as a partner.

In May, MidCap named 25-year industry veteran John Rosin as managing director to lead the national build-out of the firm’s General Industrial Asset Backed Loan (ABL) team. He previously worked at AloStar Bank as managing director, as well as senior vice president at GE Capital’s corporate finance group.

Apollo purchased MidCap Financial in late 2013 after the firm had drawn backing from Lee Equity Partners, Genstar Capital and Moelis Capital Partners.

Apollo’s Zelter said MidCap and Apollo Investment Corp, Apollo’s BDC, tackle the middle-market with different products.

MidCap typically lends asset-backed loans, revolvers, or term loans mostly as a senior secured lender. BDCs also loan money to businesses, but they don’t fall into the same bucket as a cash flow senior secured lender, where MidCap resides, he said. 

“It is two different markets,” Zelter said. “We work very well together. We source together. We hand transactions back and forth. So it’s a very … integrated approach with our coverage model.”

While LPs remain interested in backing these types businesses and related funds, deploying the money remains a challenge. Forty-three percent of credit fund managers cited deal flow as their biggest challenge over the next 12 months, according to an Aug 6 Preqin survey of more than 100 managers. Private debt fund managers hold a record $185 billion in dry powder, the survey said.