TPG gets exposure to bank-eligible loans in middle market

The $500 million joint venture, known as Strategic Credit Partners, will provide senior secured financing to U.S. companies in the communications; healthcare; information services and technology; industrials; and restaurant industries, according to a press release. The partnership with CIT provides TPG’s $12 billion special situations platform with access to “straight down the fairway, bank-eligible assets,” the source said.

TPG provided $135 million of equity to Strategic Credit Partners through its TSSP Adjacent Opportunities Partners fund. CIT contributed an additional $15 million of equity to the joint venture, the source said, with Capital One providing additional financing.

CIT will hold portions of the loans sourced through the joint venture on its balance sheet. As a bank, CIT has more conservative lending standards than TPG’s primary mid-market lending vehicle, its business development company. Because of the tighter standards, assets sourced through the joint venture will provide financing to businesses at lower multiples (typically around 3x).

“These are assets that are actually being funded on CIT’s bank balance sheet with depositors’ [money],” the source said. “These are assets that will have regulatory scrutiny.”

Asset managers like TPG usually build exposure to those assets by taking an equity stake in a regional bank or a lender like CIT. With the joint venture, TPG can access CIT’s bank-eligible loan platform while also retaining significant control over what assets make it into the joint venture pool, sources said.

“For every deal that goes through the JV, CIT has voting rights, TPG has voting rights,” CIT’s President of Corporate Finance Jim Hudak told Buyouts in August.

Bigger holds

On CIT’s end, the joint venture will allow the lender to increase the sizes of its holds on individual loans, as it can now allocate some portion of the hold to its balance sheet and the rest to the new joint venture, Hudak said. This gives the lender an advantage in obtaining lead agent status on new facilities. Many sponsors select a facility’s lead agent based on the size of their loans and ability to execute.

“From our standpoint, this broadens our franchise,” Hudak said. “The deals we’re going after are the same deals we’ve always gone after, but, with a partner, it puts us in the driver’s seat when we’re competing for lead agencies.”

TPG’s appetite for risk mirrors that of CIT, Hudak said. CIT typically provides loans with businesses between $10 million and $50 million of EBITDA.

“This was a strategic way for us to win more lead agencies, service our clients and, I think, very prudently manage our balance sheet,” Hudak said.

TPG Adjacent Opportunities Partners fund

TPG’s investment in the joint venture with CIT came through its Adjacent Opportunities Partners fund, which the firm marketed to select limited partners in 2014 as a sidecar to its $3.2 billion TPG Opportunities Partners III vehicle, according to Oregon Investment Council documents.

The vehicle is designed to invest in broader opportunities sourced through the special situations platform, assets that could include portfolios of non-performing European loans, infrastructure assets, drug royalty strategies or direct loans to U.S. middle-market companies, according to Oregon documents. TPG targeted a 10 to 15 percent return for the vehicle.

Oregon committed $250 million to the vehicle. Returns for the vehicle were not available as it is still in its J-curve.