John G. Martin, president and CEO of GE Antares Capital, lent us some of his valuable time to talk about the U.S. middle-market lending environment, as well as his firm’s Access GE Program, which hosted several private equity clients in Brazil recently. One of the founding partners of Antares Capital, Mr. Martin has been with GE Capital since 2005, and oversees a $10 billion portfolio of acquisition loans and investments.
Q: Middle-market valuations have been one of the more discussed topics in PE circles in recent quarters. Our last Middle Market Report pegged the median valuation-to-EBITDA multiple at 10.5x in 2013, versus 8.4x in 2012. From your standpoint as a major lender to the middle market, what kinds of effects have these valuations had on dealmaking?
A: Interestingly enough, the elevated valuations that we have seen over the past 18 months do not seem to have put any sort of damper on dealmaking in the middle market. There continues to be significant liquidity coming into the market at all levels of the capital structure. The consensus seems to be that there is still upside in the overall economy, which allows equity investors to justify the valuations which are required to compete in today’s market. When combined with continued low interest rates, this produces an environment where both buyers and sellers of businesses are plentiful. We don’t expect that dynamic to change in the near-medium term.
Debt levels for middle-market deals are going back up. The median debt-to-EBITDA multiple for middle-market buyouts in 2013 was 6.4x, above even the apex of the buyout boom (5.7x in 2006). Is this just a function of investors taking advantage of the good credit markets while they’re here, or is something else at play?
The combination of modestly optimistic economic expectations and historically low interest rates has continued to push combined debt multiples higher. Money continues to flow into floating rate debt funds and CLO issuance is on track to hit an all time high in 2014. Investors in these investment vehicles seem to be more focused on the search for yield than the absolute risk that they are taking on.
We noticed that senior debt is comprising a larger percentage of debt financing at the moment, at the expense of junior debt like mezzanine and high-yield bonds. I was wondering if you were noticing the same thing, and if so, how much longer you expect the trend to continue.
In general, first lien debt, where we play, remains at a relatively consistent level in the average capital structure compared to historical levels. We have, however, seen the displacement of mezzanine debt by second lien investors who are willing to take on a similar level of risk at a modestly lower return. As long as interest rates remain near their present level, this dynamic is unlikely to change.
GE Antares recently took several PE firms to Brazil as part of its Access GE program. What kind of opportunities are investors seeking in the region?
Many of our private equity clients are looking for investment opportunities in historically non-traditional areas. In some cases this is represented by geographic expansion; in others it means evaluating investments in industries that they have not focused on in the past. Given GE’s presence in Brazil, we recently invited a series of PE firms to Brazil as a part of our Access GE program, through which GE Antares connects private equity firms and their portfolio companies with the knowledge and connections that span across all the industrial businesses within GE. The trip was designed to help clients understand more about the potential opportunities which are emerging in the country, particularly in energy-related businesses. We’ve seen more energy-related business opportunities in the pipeline in the last 12 months than in the last five years combined. While there, we arranged for presentations from both business and government leaders in Brazil and toured GE’s new Global Research Center, which focuses on bioenergy and offshore/subsea systems, opening soon in Rio de Janeiro.