Garrett Black May 19, 2015
Lawrence Golub is the Chief Executive Officer of Golub Capital. He serves on the investment committee for each of the firm’s credit strategies and, with David Golub, is responsible for the overall management of the firm. Recently, he took time to discuss a variety of topics with us, ranging from middle-market sponsor finance to current regulations.
How has business been so far in 2015?
Business has been great. We’re on track for a record first half in 2015 after a record 2014. Our middle market loan balance sheet is now bigger than GE Antares. We often get asked why we have been able to do so well in a slow market. I think the answer is our scale and our reliability. We have now done deals with about 200 middle market private equity sponsors, and they keep coming back. Over 80% of our deals in the last two years have been repeat sponsors.
We’re also growing our team. We have added over 10 new positions for originators and underwriters since January and have hired individuals within these roles from firms that have uncertain futures. And we have room for more.
What trends in middle-market sponsor finance are you seeing carry over from 2014 into 2015, and how are they affecting your business?
All of a sudden lender reliability is what private equity firms are focused on. They want to know that their financing will close for sure, that they won’t have to rely on a syndication, and that they won’t have to work with new people. That last point has become really important.
How do you see those trends developing in the short term?
The pace of new U.S. private equity deals has slowed dramatically. Strategic buyers are winning more often, and prices are high enough in some cases to deter PE buyers. I think the slow pace is hurting second- and third-tier lenders and causing some to take too much credit risk. This is starting to show in BDC earnings reports. Despite a really benign credit environment, we are seeing a number of BDCs report significant credit losses. Investors are noting this, and the smart ones are starting to show concerns about committing capital to smaller and newer platforms. Some are just waiting. I think they are smart to slow down. Newer lenders are under too much pressure to put money to work, and they are making what we think are some dumb loans.
Do you foresee any temporary impacts on the market, what with GE Capital leaving?
I’m sure the distraction and uncertainty of the sales process will hamper GE. But with new deal activity slow, there is plenty of lending capacity out there. Sensible deals will still be easily financed. For example, we have billions of capital ready to loan.
With banks moving away from riskier opportunities as regulations remain tight, what effect do you think that’ll have on the middle market?
We anticipate a continuing shift away from “underwrite to syndicate” solutions and toward “buy and hold” solutions. In the long run, we think this will be good for everybody. “Buy and hold” lenders fundamentally care more about the success of their obligors. To a smart private equity firm, the key is maximizing the chance that their deal will succeed. A regulated lender (even an insurance company) has to keep looking over its shoulder at how their loan book will be reviewed. This means a regulated lender is worried first about its own issues rather than the success of its private equity clients. We unregulated lenders can focus on delivering solutions that help our clients win more often.
Featured image courtesy of Golub Capital.
For a comprehensive overview of PE investment in the middle market, check out PitchBook’s latest free report on the space here.