Mezz Lender Babson Capital Anticipates Big Year

Mezzanine lender Babson Capital Management LLC is anticipating a healthy 2011 for its business, after finishing 2010 in a rush.

The Springfield, Mass., lender, a unit of the $132 billion Massachusetts Mutual Life Insurance Co., has $4.5 billion under management, three quarters of it in mezzanine and one quarter in co-investments and limited partnership interests.

“Our view is that 2011 is going to be a pretty good year,” Michael Hermsen, a managing director at Babson Capital and the head of its private finance group, told Buyouts. That, notwithstanding a bit of a seasonal slump as the year began. “I would call it a little slow right now as we speak,” Hermsen said. “Part of that is the hangover from all the activity we saw in the last third of last year.”

Over the last six or seven years, Babson Capital typically has made 20 to 25 new platform investments and six to 10 add-on deals per year, concentrating on lower mid-market operating companies with $10 million to $20 million of underlying EBITDA. But business plummeted during the Great Recession; in 2009, the firm did only 11 platform deals and five or six add-ons. Where the firm historically put $375 million annually out the door, the amount plunged in 2009 to $225 million.

The numbers revived last year, when the firm invested $360 million in 19 platform deals and 10 add-ons, Hermsen said. “2010 was very unusual in that it was very slow for the first two thirds of the year and very busy in the last third of the year.”

Of the 29 investments the firm made in 2010, 10 of them closed in December and 19 in the fourth quarter. And of the $360 million that Babson Capital put to work last year, $300 million of total was in the last four months of the year, he said.

A pair of year-end transactions involved the Cleveland buyout shop The Riverside Company, a specialist in small deals. Babson Capital provided subordinated financing alongside senior lender US Bank for Riverside’s investment in Sunrise Windows, a maker of energy efficient replacement windows in Temperance, Mich.

Babson Capital also helped Riverside score an exit, by providing mezzanine financing to the New York buyout shop TZP Group alongside senior lender Madison Capital for Riverside’s $150 million sale of The Dwyer Group, of Waco, Texas, which owns a series of service-based franchise businesses.

Since 1993, Babson Capital, which currently works with 40 to 50 buyout shops, has provided 35 financings for Riverside, its most active sponsor, and a couple dozen or more with its No. 2 and No. 3 shops, Hermsen said, without naming them. “Relationships matter quite a bit,” Hermsen said. “They do keep coming back to us.”

Babson Capital almost always makes a small minority co-investment with a deal’s sponsor side by side with its subordinated debt, aligning Babson’s interests with those of the sponsors it works with, in contrast to banks, which only want their money back with interest, Hermsen said. “Because we invest in the equity of almost every deal we invest in, or we have warrants, an equity kicker, we are also concerned that the company do well, continue to grow, so that when the company is eventually sold it will produce a nice capital gain for us.”