TPG Capital Is Planning $1B BDC

TPG Capital, the $48 billion buyout mega-firm, is planning to crack the leveraged lending business by forming a business development company.

The San Francisco firm’s plans were disclosed by the New Jersey State Investment Council, which made a $52.4 million pledge to TPG Specialty Lending Inc., which has a target fund size of $750 million to $1 billion.

TPG, which despite its size is a low-profile operator even by the standards of the private equity business, declined comment. But the New Jersey SIC provided a glimpse into the firm’s plans.

TPG Specialty Lending plans to make standalone first-lien loans, standalone second-lien loans, mezzanine loans, unitranche loans and it also may invest in the equity of the companies it lends to through warrants and other instruments, the pension said. Borrowers typically would be generating $10 million to $250 million of EBITDA.

TPG Specialty Lending plans ultimately to become a BDC, which is a closed-end investment fund that is publicly traded on a stock exchange. Designed to provide capital to privately owned businesses, BDCs can provide both equity and debt financing, and because they can leverage their assets at a 1:1 ratio, a $1 billion fund would have an effective $2 billion capacity to invest.

According to the New Jersey SIC, TPG Specialty Lending will have six years from the time when it makes its initial fund closing to issue stock; otherwise it will be required to wind down its operations.

BDCs have drawn increasing interest since the economy began its recovery from the economic crisis in 2010. According to the investment bank Lincoln International, at least seven BDCs have gone public since April 2010, collectively raising $746 million, which would give them roughly $1.5 billion in lending capacity.

So far in 2011, existing BDCs have raised $1.3 billion in capital, giving them as much as $2.7 billion in lending capacity, according to Lincoln International. The largest single fundraise this year was by Fifth Street Finance Corp., which raised $295.5 million, the investment bank said.