Health Care Lender Readies First Senior Slug

MidCap Financial LLC, a new specialty health care lender backed largely by Genstar Capital and Lee Equity Partners, is poised to close its inaugural deal before year-end, sources from the two buyout firms said.

The Bethesda, Md.-based lender opened its doors for business in early October, but didn’t formally announce its presence in the market until late last month. The firm is led by CEO Howard Widra, founder of Merrill Lynch Capital Healthcare Finance, and other senior managers from the Merrill Lynch team.

MidCap Financial provides senior loans ranging in size from $10 million to $200 million, including leveraged loans to back health care-related LBOs; asset-based loans to hospitals and physician groups; real estate mortgages to skilled nursing facilities and other assisted living facilities; and life sciences loans to pharmaceutical, biotech and medical device companies with or without venture capital backing. The firm will participate in deals with enterprise values up to about $300 million. MidCap Financial’s first deal, expected to close later this month and still undisclosed, falls under the life sciences category.

The founding of Midcap Financial marks the first time Genstar Capital and Lee Equity have teamed up on a deal. The deal was brokered by investment bank Moelis & Co., whose private equity arm Moelis Capital Partners took a minority stake in MidCap Financial. All told, the new lender is backed by $500 million in equity from its three sponsor-owners, and has another $300 million in the form of a long-term debt facility led by Wells Fargo Foothill.

“It’s a very interesting time in the credit market where it’s much better to be a lender than a borrower,” said Ryan Clark, a principal at Genstar Capital. Lenders, he added, “are seeing very attractive pricing at very low leverage levels.”

The health care angle was also attractive to the investors given the industry’s tendency to remain buoyant in down economies. “In today’s world, health care is among the only parts in the economy exhibiting some growth, and there are great macro drivers, too, given the aging of the population and so forth,” said Bharath Srikrishnan, a principal at Lee Equity.

Meantime, the barriers to entry in health care lending remain considerable given the high degree of specialization needed. “Because of that, banks or finance companies that pursue generalist strategies can’t be as competitive,” Srikrishnan added. If all goes as planned, Midcap Financial will participate in between 20 and 30 transactions per year and have a portfolio of 80 and 100 customers over the next three to five years.

Clark and Srikrishnan said their respective firms, as well as Moelis Capital, would probably seek out loans from MidCap Financial for their own health care-related deals. And because the sponsors are not involved in the credit process, Srikrishnan said there would be no conflicts of interest. “We’re just three customers who happen to own stakes in the company,” he said.