MidCap Financial LLC has received a vote of confidence from its bank backers, which earlier this month provided the sponsor-owned specialty lender with a $250 million expansion to its existing senior credit facility.
The deal is the latest in a series of recent sponsor-backed lending developments, and it underscores a significant comeback in the specialty finance market, which saw several casualties after being battered by the economic downturn.
With the credit markets once again opening up, and an air of pent-up demand for buyout shops to put their equity capital to work, a number of firms have already placed bets on sponsor-focused specialty finance companies.
In May,
If the specialty finance sector continues to expand, buyout shops could find themselves with several more financing options just as deal flow is expected to pick up.
MidCap Financial was formed in October 2008 by
“The MidCap deal really shows that the market is opening up for these types of lending facilities,” said Tony Salewski, a vice president at Genstar Capital who serves as a director at MidCap Financial.
Indeed, the market appears to have made a 180-degree turn from where it was a few years ago. Specialty finance companies were hit hard following the credit crisis and subsequent economic downturn between the summer of 2007 and early 2009.
FirstLight Financial is one sponsor-backed specialty finance company whose downfall was underwritten during that period. The Old Greenwich, Conn.-based provider of senior, second-lien and mezzanine debt was a 2006 start-up backed by
LBO-focused Freeport Financial is another specialty finance company that began closing shop after the credit markets tightened and deal flow slowed. The Chicago-based lender of first-lien, second-lien and mezzanine debt, formed by hedge fund manager Stark Investments, laid off most of its 23 employees in early 2009 and began winding down its portfolio. Today the company’s Web site lists a total of four professionals.
Now that the market has stabilized and banks have expressed a willingness to once again provide financing to specialty lenders, it’s likely that we’ll continue to see more deals in the sector.
In June, the New York firm hired Larry Marsiello, a former vice chairman at CIT, to serve as a special adviser on specialty lending and other credit-related opportunities. In his new post, Marsiello will help Pine Brook Road source deals, attract management teams and build relationships with debt financing sources, Glanville said.
Asked whether it was particularly dangerous to get involved in a new lending business while the possibility of a double-dip recession still looms, Glanville said there are ways to mitigate such risks. Strategies include acquiring or building a lender in sectors deemed relatively “recession-proof” such as health care, or focusing on asset-backed lending in categories that are less susceptible to asset price declines.