In October Norwest Equity made a deal that’s unorthodox for the mid-market buyout shop, committing $75 million to Pangaea Asset Management, a Chicago-based asset management firm founded last year by former pros of senior lender GE Antares. This isn’t the only investment by Norwest Equity in the financial services sector—in October, it acquired Wealth Enhancement Group LLC, a private wealth manager—but Pangaea is different. The company, which focuses primarily on managing mid-market leveraged loan investments, is using the Norwest Equity funds to acquire other asset managers or take over the management of new debt vehicles. It’s also seeding a new distressed debt fund and looking at mid-market syndicated loans. That market is slow right now, but Pangaea can be very selective given the lack of investor capital available, said Todd Solow, a Norwest Equity principal.
It might seem like the worst possible time to delve into this risky niche, but that’s not how Norwest Equity sees it. The firm’s hypothesis is that tightened credit markets will make it difficult for smaller CLO managers to turn a profit because it is difficult to raise new vehicles and increase their assets under management. This, in turn, could make it difficult for those managers to pay staff and to cover rent and pay for other overhead. Further, with its typical holding time of five years, Norwest Equity figures Pangaea will be able manage CLO portfolios until investor appetite returns.
Two recent deals show Norwest Equity is so far correct. Pangaea acquired CapitalSource Advisors LLC, the investment manager for CS Advisors CLO 1, Ltd. on Feb. 11; the assets became available last year after mid-market finance company CapitalSource unwound its CLO operations in September and laid off the group’s employees. Separately, on Feb. 1, Pangaea reached an agreement with Merrill Lynch & Co. to take on a sub-servicing role, including investment recommendations and analysis, for 250 Capital LLC, a CLO affiliated with the investment bank. Norwest Equity announced the deals March 18 because notice provisions restricted Pangaea from announcing them immediately.
The two entities give Pangaea assets under management of more than $1 billion. Norwest Equity’s goal is to increase assets under management to the point that Pangaea is a multi-billion-dollar asset manager, said Solow, who declined to provide a specific target.
This isn’t the usual buyout deal for Norwest Equity, in which it acquires a company for a given multiple of EBITDA. The firm committed a set amount of equity for Pangaea to deploy opportunistically. “If the CLO market remains dormant for the remainder of 2008, we will remain patient with our capital,” Solow said. “Without any further expansion or investment, Pangaea remains a profitable manager.”
Pangaea still has more than $50 million of the Norwest Equity commitment to draw on. It will devote $10 million to $25 million of that to a new distressed fund, tentatively called
Shear, David Schmuck and Mike King, professionals from Antares Capital Corp. and Antares Asset Management, founded Pangaea in 2007—just before the CLO market collapsed. Shear was most recently president of GE Antares Capital, the entity created in 2005 after GE Commercial Finance acquired mid-market lender Antares. “I got off an ocean liner to get on a raft in the North Sea,” Shear joked.
Eventually, Norwest Equity intends to sell off Pangaea to a much larger asset manager, though it is not focusing on the exit right now. Solow and Shear said it might be difficult to build up assets in the near future, though they are nonetheless anticipating more opportunities. Shear also said that when the CLO market returns, investors will want managers with ample experience who have withstood the downturn. “We have staying power,” he said.
Norwest Equity is confident in Pangaea’s strategy and in the firm’s leadership. Over the last eight years, the team has managed pools of leveraged loans across seven different CLOs and three separate account arrangements. “I think we felt like we were backing a best-in-class management team,” Solow said. “Our view was that in the current rough market there’s going to be some consolidation. Our capital is out there to facilitate that.”—B .V.