Mid-Market Lenders Shunned On The Block

A pair of lenders that specialize in providing financing to mid-market buyout firms remain out in the cold after months on the auction block.

Freeport Financial

and FirstLight Financial Corp., whose sale processes are independent of one another, have stopped making new loans and are focused on managing their existing portfolios, which include loans involving more than a dozen buyout firms, according to sources.

Chicago-based Freeport Financial, a four-year-old firm with the backing of hedge fund manager Stark Investments, is run by a core team of ex-GE professionals and provides first and second lien tranches as well as mezzanine debt and equity co-investments in transactions ranging in size from $10 million to $500 million.

Global lending firm Orix Corp. had its eyes on acquiring Freeport Financial earlier this year, going so far as to sign a letter of intent with the Chicago firm. But it pulled out of the deal just weeks before it was set to close, sources said. Dave Allen, a managing director at Freeport Financial, declined to comment for this story, and calls to other professionals at the firm went unanswered. Calls to Orix also were not returned.

One theory for the broken deal is that high overhead costs associated with Freeport Financial’s operations could eat substantially into the returns that an equity investor can make from owning the lender, a source said. Executives at Stark Investments were unavailable for comment.

While Freeport Financial may be stalled on new financings, the firm is still tending to existing investments. “They are a lender to our portfolio company Interdynamics and have continued to be supportive to that company,” said Aaron Davenport, a principal at Arsenal Capital. A source also noted that the firm has a good track record and that its troubles may just be a function of the current credit market.

FirstLight Financial is a 2006 start-up owned by business development company Ares Capital Corp. and buyout firm Catterton Partners. The Old Greenwich, Conn.-based lender has laid off a significant portion of its professionals, culling itself down to a more cost-effective crew. In March, FirstLight Financial laid off 20 employees, bringing its head count down to less than 20 people from a high of more than 60 last year. The lender also shuttered its Atlanta office.

“They are still trying to find new sources of capital and they’ve whittled themselves down to an operating structure where they can ride out the current cycle based on the income that their current portfolio is producing,” a source said. Ares Capital has pumped more than $100 million into FirstLight Financial through a combination of subordinated debt and equity, according to a regulatory filing. Catterton Partners has not disclosed the size of its investment in the debt provider.

It’s unclear what will happen to Ares Capital Corp.’s and Catterton Partners’s investment in FirstLight should the company not get sold. A source close to Catterton Partners told Buyouts in March that the firm should be able to generate enough income from FirstLight Financial’s loan portfolio to offset any losses in its equity investment in the lender.

Ron Carapezzi, president & CEO of FirstLight Financial Corp., declined to comment for this story, deferring press calls instead to Catterton Partners. Calls to both Ares Capital and Catterton Partners were not returned.

According to its Web site, FirstLight Financial is backed by $1 billion of long-term committed capital and can underwrite up to $200 million and hold up to $30 million in a single transaction.